(a) All such common stock is held by Allegheny Energy, Inc., the parent company.

(b) All such common stock is held by its parents, Monongahela Power Company and Allegheny Energy Supply Company, LLC.

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THIS COMBINED FORM 10-K 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 HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

     Allegheny Energy, Inc. (AE), incorporated in Maryland in 1925, is a diversified utility holding company which has experienced significant changes in its business as a result of the deregulation of electric generation in states where its subsidiaries operate. As deregulation of electric generation has been implemented, AE's subsidiaries have transferred their generating assets, excluding Monongahela Power Company's West Virginia jurisdictional assets, from their regulated utility businesses to an affiliated, unregulated generation business in accordance with approved deregulation plans. AE owns directly and indirectly various regulated and non-regulated subsidiaries (collectively and generically Allegheny, we, us or our).

     As a result of the deregulation activities, AE has aligned its businesses into three principal business segments: regulated utility operations, unregulated generation operations and other unregulated operations. The regulated utility operations segment consists primarily of (i) three regulated electric public utility companies, Monongahela Power Company (Monongahela) (Monongahela also has a regulated natural gas utility division as a result of its purchase of West Virginia Power in 1999), The Potomac Edison Company (Potomac Edison), and West Penn Power Company (West Penn), and (ii) a regulated public utility natural gas company, Mountaineer Gas Company (Mountaineer), which is a subsidiary of Monongahela (all collectively doing business as Allegheny Power, and collectively Monongahela, Potomac Edison and West Penn and their subsidiaries are referred to herein as the Distribution Companies). The regulated utility operations segment operates electric transmis sion and distribution (T&D) systems and natural gas distribution systems. It also generates electric energy in its West Virginia jurisdiction where deregulation of electric generation has not yet been implemented. Allegheny Power delivers electricity to approximately 1.5 million customers in parts of Maryland, Ohio, Pennsylvania, Virginia and West Virginia. Through the acquisition of West Virginia Power and Mountaineer, Allegheny Power also delivers natural gas to approximately 230,000 customers in West Virginia.

     The Allegheny family of companies also includes an unregulated generation operations segment, consisting primarily of Allegheny Energy Supply Company, LLC (AE Supply), including Allegheny Generating Company (AGC). AE Supply is an unregulated energy company that develops, owns, operates and controls electric generating capacity and, through its energy marketing and trading division, supplies and trades energy and energy-related commodities in domestic retail and wholesale markets. AE Supply manages its generating assets as an integral part of its wholesale marketing, fuel procurement, risk management and energy trading activities. AGC owns and sells generating capacity to its parent companies, AE Supply and Monongahela.

     The other unregulated operations segment consists of Allegheny Ventures, Inc. (Allegheny Ventures),

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     Monongahela, incorporated in Ohio in 1924, operates its T&D system in northern West Virginia and an adjacent portion of Ohio. It owns generating capacity in West Virginia and Pennsylvania. In all jurisdictions, Monongahela is doing business under the trade name Allegheny Power. Including the assets of West Virginia Power, which were acquired by Monongahela in 1999, Monongahela serves about 390,000 electric customers and about 24,000 retail and wholesale natural gas customers in a service area of about 13,000 square miles with a population of about 815,000. Monongahela owns approximately 698 miles of natural gas distribution pipelines, and during 2001 sold approximately 2.963 billion cubic feet (Bcf) of gas. In June 2001, Monongahela transferred approximately 352 megawatts (MW) of generating assets and a portion of its ownership in AGC to AE Supply at net book value. Monongahela's remaining generating assets, 2,115 MW which serve customers in West Virginia, and its entitlement to capacity in the Ohio Valley Electric Corporation (OVEC) will not be transferred unless tax changes and implementation authorization related to the deregulated power market in West Virginia have been enacted or the West Virginia Public Service Commission otherwise takes regulatory action, and the Securities and Exchange Commission approves the transfer. The seven largest communities served by Monongahela have populations ranging from 10,900 to 33,900. This service area has navigable waterways and substantial deposits of bituminous coal, glass sand, natural gas, rock salt, and other natural resources. Its service area's principal industries produce coal, chemicals, iron and steel, fabricated products, wood products, and glass. There are two municipal electric distribution systems and two rural electric cooperative associations in its electric service territory. Except for one of the cooperatives, in 2001 they purchased all of their power fr om Monongahela.

     Mountaineer, a subsidiary of Monongahela, is a natural gas distribution company incorporated in West Virginia in 1957. Mountaineer serves approximately 205,000 retail natural gas customers in West Virginia. Mountaineer owns approximately 4,000 miles of natural gas distribution pipelines. During 2001, Mountaineer sold or transported 58.45 (Bcf) of gas. Mountaineer Gas Services, Inc. (MGS), a subsidiary of Mountaineer, operates natural gas producing properties, gas gathering facilities, and intra-state transmission pipelines and is engaged in the sale and marketing of natural gas in the Appalachian basin. MGS owns more than 375 natural gas wells and has a net revenue interest in about 100 wells of which it is not the operator.

     Potomac Edison, incorporated in Maryland in 1923 and in Virginia in 1974, operates its T&D system in portions of Maryland, Virginia, and West Virginia. In all jurisdictions, Potomac Edison is doing business under the trade name Allegheny Power. Potomac Edison serves about 411,000 electric customers in a service area of about 7,300 square miles with a population of about 782,000. In August 2000, Potomac Edison transferred all of its generation assets (except for its 3 MW of Virginia hydroelectric assets), its interest in AGC and its entitlement to capacity in OVEC to AE Supply pursuant to state legislation and regulatory proceedings. On June 1, 2001, Potomac Edison transferred its 3 MW of hydroelectric assets located within Virginia to its subsidiary, Green Valley Hydro, LLC, and distributed its ownership of Green Valley Hydro, LLC to AE. The six largest communities served by Potomac Edison have populations ranging f rom 11,900 to 40,100. Potomac Edison's service area's principal industries produce aluminum, cement, fabricated products, rubber products, sand, stone, and gravel.

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     West Penn, incorporated in Pennsylvania in 1916, operates its T&D system in southwestern and north and south-central Pennsylvania. West Penn is doing business under the trade name Allegheny Power. West Penn serves about 684,000 electric customers in a service area of about 9,900 square miles with a population of about 1,399,000. In November 1999, West Penn transferred all of its generation assets, its interest in AGC and its entitlement to capacity in OVEC to AE Supply pursuant to state legislation and regulatory proceedings. The 10 largest communities served by West Penn have populations ranging from 11,200 to 38,900. West Penn's service area has navigable waterways and substantial deposits of bituminous coal, limestone, and other natural resources. Its service area's principal industries produce steel, coal, fabricated products, and glass.

     AE Supply, a Delaware limited liability company, was formed in November 1999 to take advantage of the opportunity to transfer to AE Supply at net book value some of the generation assets of the Distribution Companies as a result of economic factors and federal and state legislative and regulatory changes related to the development of competitive markets. AE Supply is expanding its generation fleet through the announced construction and development of new facilities, acquisition of contractual rights to control generating capacity and planned expansions to existing facilities. In March 2001, AE Supply also acquired Global Energy Markets, the energy marketing and trading business of Merrill Lynch, which now operates as the Energy Marketing and Trading division of AE Supply. This division helps optimize AE Supply's portfolio of generating assets by significantly enhancing its risk management, wholesale marketing, fuel procure ment and energy trading activities on a nationwide basis. AE Supply manages all of its generation assets as an integrated portfolio with its risk management, wholesale marketing, fuel procurement and energy trading activities.

     AE Supply, as part of its generating asset and energy commodity portfolio, interfaces the electric generating capacity represented by AE Supply's generating assets and the electric generation operation owned by Monongahela, and various customers or markets. In 2000, an arrangement was put in place between Monongahela and AE Supply to create this interface. Under this arrangement, Monongahela sells the amount of its real time, available bulk power generation that exceeds its regulated load to AE Supply and conversely Monongahela buys generation from AE Supply when regulated load at times exceeds that amount of real time, available bulk power generation. Monongahela (for its Ohio service territory), Potomac Edison and West Penn also purchase generation from AE Supply under long-term power sales agreements to meet their default service obligations. These transactions take place under the terms of tariffs filed with the Federal Energy Regulatory Commission.

     AGC, organized in 1981 under the laws of Virginia, is jointly owned as follows: Monongahela, 22.97% and AE Supply, 77.03%. AGC has no employees, and its only asset is a 40% undivided interest in the Bath County (Virginia) pumped-storage hydroelectric station, which was placed in commercial operation in December 1985, and its connecting transmission facilities. AGC's 960-MW share of generating capacity of the station is sold to its two parents. The remaining 60% interest in the Bath County Station is owned by Virginia Electric and Power Company (Virginia Power).

    Allegheny Ventures, incorporated in Delaware in 1994, is an unregulated subsidiary of AE which, through its subsidiaries, invests in and develops fiber and data services and energy-related projects and provides energy consulting and management services and natural gas and other energy-related services. Allegheny Communications Connect, Inc., a Delaware corporation, and Allegheny Energy Solutions, Inc., a Delaware corporation, are both wholly owned subsidiaries of Allegheny Ventures. On November 1, 2001, Allegheny Ventures completed the acquisition of Fellon-McCord Associates, Inc. (Fellon-McCord),

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     Allegheny Energy Service Corporation (AESC), a wholly owned subsidiary of AE, was incorporated in Maryland in 1963 as a service company for Allegheny. Aside from a few employees obtained by AE Supply as part of the Midwest asset acquisition and employees obtained by Allegheny Ventures as part of the Fellon-McCord transaction, AE, AE Supply, the Distribution Companies, AGC, Allegheny Ventures and their subsidiaries have no employees. Their officers and non-officers are employed by AESC. AESC's employees provide all necessary services to AE, AE Supply, the Distribution Companies, AGC, Allegheny Ventures and their subsidiaries. Those companies reimburse AESC for services provided by AESC's employees. On December 31, 2001, AESC had approximately 5,600 employees.

     In November 2001, AE Supply and its parent, AE, filed applications with the Securities and Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC) seeking authorizations under the Public Utility Holding Company Act of 1935, as amended (PUHCA) and the Federal Power Act to restructure the corporate organization by creating a new Maryland holding company into which AE Supply will then merge. AE Supply will thereby be changed from a Delaware limited liability company into a Maryland corporation. AE Supply and its parent, AE, also sought authorization to merge Allegheny Energy Global Markets, LLC, one of AE Supply's wholly owned subsidiaries, into this new Maryland holding company, which will then continue to conduct AE Supply's energy commodity marketing and trading activities as the Energy Marketing and Trading division. On December 31, 2001, AE Supply received SEC and FERC approvals to effect this reorganizat ion. Effective December 31, 2001, Allegheny Energy Global Markets, LLC, was merged into AE Supply, excluding its employees, an operating lease and related leasehold improvements for its New York office, certain computer software and telecommunications equipment, and other miscellaneous assets, which were transferred to AESC, a subsidiary of AE. AE Supply will be merged into the yet-to-be-formed Maryland holding company in 2002.

     On July 23, 2001, AE Supply together with AE and other affiliates, filed a U-1 application with the SEC, seeking authorization under the PUHCA to effect an initial public offering of up to 18% of the common stock of the yet-to-be-formed Maryland holding company, which would own 100% of AE Supply, and then distribute the remaining common stock owned by AE to its shareholders on a tax-free basis. In October 2001, AE and AE Supply announced that the proposed initial public offering would be delayed due to market and other conditions. On January 31, 2002, AE and AE Supply announced that the initial public offering would not be pursued. On February 8, 2002, AE and AE Supply filed an amendment to the U-1 application filed on July 23, 2001, with the SEC, withdrawing AE Supply's initial public offering application.

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     In addition to the historical information contained herein, this report contains a number of "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These include statements with respect to deregulation activities and movements toward competition in states served by the Distribution Companies; 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 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: general and economic and business conditions, including the continuing effects of the September 11, 2001 terrorists' attacks; changes in industry capacity, development, and other activities by Allegheny's competitors; changes in the weather and other natural phenomena; changes in technology; changes in the price of power and fuel for electric generation; changes in the underlying inputs and assumptions used to estimate the fair values of commodity contracts; changes in laws and regulations applicable to Allegheny; its markets, or its activities; litigation; 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.

     In addition to the preceding factors, Allegheny's businesses are subject to a number of risks.

From time to time the demand for power required to meet the provider-of-last-resort contract obligations could exceed AE Supply's available generation capacity. If this occurs, AE Supply would have to buy power on the market at prices which may exceed the traditional marginal production and delivery costs of AE Supply's owned or controlled assets. Although AE Supply may be able to charge West Penn, Monongahela with respect to its Ohio customers and Potomac Edison these higher incremental costs pursuant to the terms of long-term power sales agreements, those companies might not be able to pass the costs on to their retail customers, resulting in the possibility that AE could lose money or profit potential on a consolidated basis. Since these situations most often occur during periods of peak demand, it is possible that the market price for power at that time would be very high. Unlike the cooler weather over the summers of 2001 and 2000, the hotter-than-normal summers of 1999 and 1998 saw market prices for electricity in regions in which our Regulated Utility Subsidiaries have provider-of-last-resort obligations peak in excess of $1,000 per megawatt-hour (MWh). Utilities that did not own or purchase sufficient available capacity prior to those periods incurred significant losses in sourcing incremental power. Even if a supply shortage was brief, we could suffer substantial losses that could have an adverse effect on our results of operations. In addition, the electricity AE's Regulated Utility Subsidiaries purchase from AE Supply to meet the provider-of-last-resort obligations is not otherwise available for sale at what most likely would be more favorable wholesale prices.

While the Regulated Utility Subsidiaries are required to provide electricity to customers who do not choose an alternative supplier, customers are with few restrictions entitled at any time to obtain service from an alternative supplier. As customers elect to purchase electricity elsewhere, AE Supply's sales of power may decrease. Alternatively, customers could switch back to the Regulated Utility Subsidiaries from alternative suppliers, which may increase demand above AE Supply's facilities' available capacity, some of which it may have committed to sell to other customers. Thus, any switching by customers could have an adverse effect on AE Supply's results of operations and financial position by reducing sales and revenues or by reducing available capacity and increasing expenses.

AE Supply's results are likely to be affected by differences in the market and regulatory structures in various regional power markets. Problems or delays that may arise in the formation and operation of new regional transmission organizations, or RTOs, such as the proposed new RTO extending across the entire Northeastern region of the United States, may adversely affect AE Supply's ability to sell electricity produced by its owned or controlled generating capacity to markets in New York or New England. The rules governing the various regional power markets may also change from time to time, which could affect AE Supply's costs or revenues. Because it remains unclear which companies will be participating in the various regional power markets, or how RTOs will develop or what regions they will cover, we are unable to assess fully the impact that these power markets may have on AE Supply's business. AE Supply's operating results will also be affected by the addition of generation or tran smission capacity serving PJM-West and any other power markets.

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Our plan to turn operational control of our transmission assets over to PJM Interconnection, L.L.C. in the form of PJM-West includes the risk that we may not fully recover our transmission cost of service. We have filed a proposal with FERC for a transitional surcharge to recover the costs we expect to incur as a result of participating in PJM-West. The FERC has accepted our proposal subject to possible refunds after the outcome of an evidentiary hearing inquiring into our transmission costs. Accordingly, if we decide to proceed with PJM-West in light of FERC's order, there is a risk that we will be required to pay significant refunds to our transmission customers, and that our future transmission service revenues will be materially lower than they are today.

We continue to be subject to regulation under the Public Utility Holding Company Act of 1935, or PUHCA. PUHCA limits our ability to acquire, own and operate energy assets outside of our operating region and it limits the dividends that our subsidiaries may pay from unearned surplus. In addition, we must obtain prior approval from the SEC under PUHCA in order to raise financing or to acquire the voting securities of any public utility or take any other action that would result in our affiliation with another public utility.

The success of our business depends, in part, on the economic efficiencies of integrated and coordinated utility operations between our electric transmission, distribution, wholesale marketing and retail service businesses. FERC has promulgated a rule that requires electric utilities to unbundle the services they provide so as to separate electric transmission from wholesale marketing activities. In particular, the rule requires employees with operational responsibility for transmission and reliability services to function independently from operating employees engaged in wholesale and unbundled retail marketing activities (functional unbundling). FERC currently permits senior officers and directors to have ultimate decision-making authority for both electric transmission and wholesale marketing businesses. FERC has, however, proposed to expand this functional unbundling requirement to require employees in all energy-related businesses to function independently from transmission o perating employees, which include senior management employees as well. If FERC were to expand its policy in this fashion, it could result in duplicative management responsibilities, loss of efficiencies and increased operating expenses, which could have a material adverse effect on our businesses. In addition, FERC has requested comments on whether it should require full corporate unbundling (e.g., divestiture) of electric transmission businesses from other energy-related activities. If FERC were to adopt this more extreme requirement, it could have a further material adverse effect on our businesses.

While the electric restructuring laws in Virginia and West Virginia established the general framework governing the retail electric market, the laws required the utility commission in each state to issue rules and determinations implementing the laws. Some of the regulations governing the retail electric market have not yet been adopted by the utility commission in each state. These laws, when they are interpreted and when the regulations are developed and adopted, may have a negative impact on our business, results

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It is our goal to have the West Virginia jurisdictional generating assets of Monongahela, representing approximately 2,115 MW of capacity, transferred to AE Supply. We are currently exploring ways to effect the transfer of these generating assets to AE Supply, including by regulatory action or by legislation in the West Virginia Legislature. Monongahela has filed a petition seeking the West Virginia Public Service Commission's approval of the transfer of the West Virginia jurisdictional generating assets to AE Supply. The West Virginia Public Service Commission has not yet acted on this petition, and we cannot assure you that it will permit the transfer, or when this permission might be granted. No final legislative action was taken in 2001 or during the January to March 2002 session regarding implementation of the deregulation plan. The current climate regarding the restructuring makes it unlikely that the existing plan will be advanced in 2002. If the transfer is permitted, we cannot predict the conditions that may be imposed in connection with it, such as the terms under any long-term power sales agreement necessary to meet Monongahela's provider-of-last-resort retail load obligations, transfer costs or transition periods, any of which may make the transfer uneconomical.

Because of the high levels of acquisition and transfer activity since its formation in November 1999, it may be difficult for investors to evaluate the probable impact of these acquisitions and generating asset transfers on AE Supply's financial performance or make meaningful comparisons between reporting periods until it has operating results for a number of reporting periods for these facilities and assets. For instance, as of December 31, 2001, AE Supply increased its ownership or contractual control of generating capacity to 9,895 MW from 6,472 MW owned or under contractual control as of December 31, 2000. AE Supply expects this will be an issue for the next few years as AE Supply intends to add 4,807 MW of additional capacity.

The regulatory environment of the power generation industry has recently been undergoing substantial changes, on both the federal and state levels. The majority of states have taken active steps towards allowing retail customers the right to choose their electricity supplier. On the federal level, the national Energy Policy Act of 1992 led to market-based regulations of the wholesale exchange of power within the electric industry by permitting the FERC to compel electric utilities to allow third parties to sell electricity to wholesale customers over their transmission systems. These changes have significantly affected the nature of the industry and the manner in which its participants conduct their business.

Moreover, existing statutes and regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to us or our facilities, and future changes in laws and regulations may have an effect on our business in ways that we cannot predict. Some restructured markets, such as in California, have experienced interruptions of supply and price volatility. These interruptions of supply and price volatility have been the subject of a significant amount of press coverage, much of which has been critical of the restructuring initiatives. In some of these markets, including California, government

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Our business strategy depends, in part, on our ability to identify and complete development and construction projects and any acquisitions at appropriate prices. If the assumptions underlying the prices we pay for future acquisition, development and construction projects prove to be inaccurate, the financial performance of the particular facility, our ability to recover our investment, and our overall results of operations and financial position could be significantly impaired. Moreover, if we are not able to access capital at competitive rates, our ability to pursue our development strategy will be adversely affected. A number of factors could affect our ability to access capital, including general economic conditions, capital market conditions, market prices for electricity and gas and the overall health of the utility industry, our capital structure and limitations imposed by PUHCA.

Before we can commence construction or acquire a generation facility, we may be required to invest significant resources on preliminary engineering, permitting, legal and other matters in order to determine the feasibility of the project. Moreover, the process for obtaining initial environmental, sitting and other governmental and regulatory permits and approvals is complicated, expensive and lengthy, and is subject to significant uncertainties. We may also be required to obtain SEC approval for our financing arrangements. Obtaining these permits and approvals can delay acquisition and construction. If for any reason we are not able to obtain all required permits and approvals, or obtain them in a timely manner, we may be prevented from completing an acquisition, development or construction project. For the same reasons, we also may not be able to obtain and comply with all necessary licenses, permits and approvals for our existing facilities that we seek to expand.

We have announced construction plans for four generating facilities totaling approximately 2,294 MW, and we intend to pursue our strategy of developing and constructing other new facilities and expanding existing facilities. Our completion of these facilities without delays or cost overruns is subject to substantial risks, including:

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-  shortages and inconsistent quality of equipment, material and labor;
- -  work stoppages;
- -  permits, approvals and other regulatory matters;
- -  adverse weather conditions;
- -  unforeseen engineering problems;
- -  environmental and geological conditions;
- -  delays or increased costs to interconnect our facilities to transmission grids;
- -  unanticipated cost increases; and
- -  our attention to other projects.

If we are unable to complete the development or construction of a facility, we may not be able to recover our investment in it. In addition, construction delays and contractor performance shortfalls can result in the loss of revenues and may, in turn, adversely affect our results of operations and financial position. Furthermore, if construction projects are not completed according to specifications, we may incur liabilities, and suffer reduced plant efficiency, higher operating costs and reduced earnings. Also, changes in market prices for electricity from these projects may make them uneconomic.

While we maintain insurance, obtain warranties from vendors and obligate contractors to meet specified performance standards, we remain substantially exposed to the risks described above. Furthermore, the proceeds of such insurance and the warranties or performance guarantees may not be adequate to cover lost revenues, increased expenses or liquidated damages payments that we may owe upon the realization of any of the risks described above.

We cannot assure you that these facilities, or others we might acquire or develop, or our construction projects, will generate cash flows or revenue that provide appropriate returns on our investments or that we will successfully:

- -  integrate acquired assets with our existing operations;
- -  develop our management and corporate infrastructure;
- -  negotiate favorable terms for the sale of electricity generated by the facilities we have acquired or
   developed, those we plan to construct or develop, and any we acquire in the future; or
- -  operate our acquired facilities on an efficient, cost-effective basis.

Our ability to successfully integrate assets will depend on, among other things, the adequacy of our implementation plans, including with respect to our systems integration and data processing capabilities, our ability to achieve desired economies of scale and operating efficiencies within and among our facilities, and our ability to negotiate favorable contracts in connection with the electricity that we generate. If we are unable to successfully integrate these assets into our operations, we could experience increased costs and losses on our investments.

Some of the acquisition agreements that we have entered into with third parties have required that we

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We are diversifying our dependence on coal-fired facilities through the acquisition and construction of natural gas-fired facilities, which increases our exposure to the more volatile market prices of natural gas. Almost all of our announced construction and development plans for additional generating capacity have involved natural gas-fired facilities.

Changes in the cost of coal or natural gas and changes in the relationship between those costs and the market prices of electricity will affect our financial results. Since the price we obtain for electricity may not change at the same rate as the change in coal or natural gas costs, we may be unable to pass on the changes in costs to our customers.

In addition, actual power prices and fuel costs will differ from those assumed in financial models used to value our trading positions, and those differences may be material. As a result, our financial results may fluctuate significantly and unpredictably in the future as some of those trading positions are marked to market.

To manage our financial exposure to commodity price fluctuations, we routinely enter into contracts, such as electricity, coal and natural gas purchase and sale commitments, to hedge our exposure to fuel supply and demand, market effects due to weather and other energy-related commodities. However, we do not necessarily hedge the entire exposure of our operations from commodity price volatility for a variety of reasons. To the extent we fail to hedge against commodity price volatility, our results of operations and financial position will be affected either favorably or unfavorably by price changes.

Our risk management, wholesale marketing, fuel procurement, and energy trading procedures may not always work as planned. As a result, we cannot predict the impact that our risk management, wholesale marketing, fuel procurement and energy trading decisions may have on our business, operating results or financial position.

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Our risk management, wholesale marketing, fuel procurement and energy trading activities, including our power sales agreements with counterparties, rely on models that depend heavily on management's judgments and assumptions regarding factors such as the future market prices and demand for electricity and other energy-related commodities. These factors become more difficult to predict and the models become less reliable the further into the future these estimates are made. Even when our policies and procedures are followed and decisions are made based on these models, there may nevertheless be an adverse impact on our financial position and results of operations, if the judgments and assumptions underlying those models prove to be wrong or inaccurate.

We purchase coal from a limited number of suppliers. In 2001, we purchased in excess of 63% of our coal from one supplier. Any disruption in the delivery of coal, including disruptions as a result of weather, labor relations or environmental regulations affecting our coal suppliers, could adversely affect our ability to operate our coal-fired facilities and thus our results of operations.

Delivery of natural gas to each of our natural gas-fired facilities typically depends on the natural gas pipeline or distributor for that location. As a result, we are subject to the risk that a natural gas pipeline or distributor may suffer disruptions or curtailments in its ability to deliver natural gas to us or that the amounts of natural gas we request are curtailed. These disruptions or curtailments could adversely affect our ability to operate natural gas-fired generating facilities and thus our results of operations.

In addition, we are exposed to the risk that counterparties that owe us money or energy will breach their obligations. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative hedging arrangements or honor the underlying commitment at then-current market prices. In that event, our financial results are likely to be adversely affected and we might incur losses. Although our models take into account the expected probability of default by a counterparty, our actual exposure to a default by a counterparty may be greater than the models predict.

In March 2001, AE Supply entered into a power sales agreement with the California Department of Water Resources (CDWR), the electricity buyer for the state of California. This agreement is in force for a period through December 2011. Under this agreement, AE Supply has committed to supply California with contract volumes varying from 150 MW to 500 MW through December 2004. For the last seven years of the contract, the contract volume will be fixed at 1,000 MW. The contract contains a fixed price of $61 per MWh. As of December 31, 2001, the reported prices for comparable delivery of power in California during times of peak demand in 2004 (the last year with publicly quoted prices) was $36.25 per MWh, and the fair value of AE Supply's agreement with the CDWR was approximately 22% of AE Supply's total assets. AE Supply records changes in the fair value of this agreement in AE Supply's statement of operations in wholesale revenues.

On February 21, 2002, the California Public Utilities Commission (California PUC) issued a rate agreement with the CDWR, in order for the CDWR to issue bonds to repay the state of California's general fund and other outstanding loans. The rate agreement requires the CDWR to use its best efforts to renegotiate its long-term power agreements, including its agreement with AE Supply, and it does not

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Our February 25, 2002, the California PUC and the California Electricity Oversight Board (CAEOB) filed complaints with the FERC seeking to abrogate various contracts to which the CDWR is a counterparty, including two contracts with AE Supply to sell power to CDWR. The California PUC alleges that the contracts are unjust and unreasonable due to market dysfunction and the exercise of market power by electricity suppliers during 2001 in California. As a result, the California PUC argues that the CDWR was forced to pay prices that are too high and accept onerous terms and conditions. In the alternative, the California PUC requests that the FERC reform the challenged contracts to provide just and reasonable pricing, reduce the duration of the contracts, and eliminate certain non-price terms. AE Supply is unable to predict the outcome of this litigation or the financial impact it may have on AE Supply.

If our agreement was renegotiated or the CDWR failed for any reason to meet its obligations under this agreement, the value of the agreement as an asset might need to be reduced on AE Supply's consolidated balance sheet, with a corresponding reduction in net income.

The operation of power generation, transmission and distribution facilities involves many risks, including the breakdown or failure of electrical generating or other equipment, fuel interruption and performance below expected levels of output or efficiency. In addition, weather-related incidents and other natural disasters can disrupt generation, transmission and distribution facilities. If our facilities operate below expectations, we may lose revenues or have increased expenses, including replacement power costs. A significant portion of our facilities were originally constructed many years ago. Older equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures on our part to keep operating at peak efficiency and is also likely to require periodic upgrading and improvement.

Our power generation facilities have historically been operated within vertically-integrated, regulated utilities that sold electricity to consumers at prices based on predetermined rates set by state public utility commissions. Most of these facilities are now owned by our unregulated operating subsidiary, AE Supply which, unlike regulated utilities, does not benefit from predetermined rates that include a rate of return component. Also, AE Supply's revenues and results of operations are likely to depend, in large part, upon prevailing market prices for electricity in our regional markets and other competitive markets, the volume of demand, capacity and ancillary services. Operating successfully in this new market-based, competitive environment requires different skills and expertise than the regulated market. As the markets for power, capacity and services develop, consumers may change their behavior. We have a limited operating history for these facilities in the new environment and we may not be able to operate them successfully in that environment.

AE Supply depends on transmission and distribution facilities owned and operated by utilities and other power companies to deliver the electricity it sells. This dependence exposes AE Supply to a variety of

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FERC has issued power and gas transmission initiatives that require electric and gas transmission services to be offered unbundled from commodity sales. Although these initiatives are designed to encourage wholesale market transactions for electricity and gas, fair and equal access to transmission systems may in fact not be available. Natural gas pipelines and transmitting electric utilities have filed open access tariffs in response to these initiatives, but some utilities may not fully comply with the terms of those tariffs. We also cannot predict whether transmission facilities will be expanded in specific markets to accommodate competitive access to those markets.

A key element of our business model is that generating power at central power plants achieves economies of scale and produces electricity at relatively low cost. There are other technologies that produce electricity, most notably fuel cells, micro turbines, windmills and photovoltaic (solar) cells. It is possible that advances in technology will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central power station electric production. Decreasing demand for higher quality power may also improve the competitive position of these alternative sources of power. If these things were to happen and if these technologies achieved economies of scale, our market share could be eroded, and the value of our power plants could be significantly impaired. Changes in technology could also alter the channels through which retail electric customers buy electricity, thereby affecting our financial results.

Electrical power generation is generally a seasonal business. In many parts of the country, demand for electricity peaks during the hot summer months, with market prices also peaking at that time. In other areas, electricity demand peaks during the winter months. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis. The pattern of this fluctuation may change depending on the geographical location of facilities we acquire and the characteristics of such facilities, such as, whether they are base-load or peaking facilities, as well as on the terms of power sale contracts we enter into.

The success of our business relies, in large part, on our ability to attract and retain talented employees who possess the experience and expertise required to manage our business and its growth successfully. Our current key executives have substantial experience in our industry. It may be difficult to find senior executives with similar background and experience. The unexpected loss of services of one or more of these individuals could adversely affect our ability to effectively manage our operations. Likewise, we rely, in a large part, on specially skilled employees to run our plants. Because the market for employees with the appropriate skills is tight in many regions, our inability to attract employees of a similar caliber in the future could limit our ability to appropriately manage facilities in certain markets, which, in turn, could hamper our efforts to successfully expand into those markets and thus limit our growth.

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We may not be able to respond in a timely or effective manner to the many changes in the power industry resulting from regulatory initiatives to increase competition. Until quite recently, we operated as part of an integrated public utility system subject to rate regulation. We must now adapt to the new competitive environment, where we need new and different skills to succeed. If we do not manage this transition successfully, our results may suffer. In addition, we remain subject to significant regulatory constraints for example, requirements under the PUHCA that may hinder our efforts to respond to the changing competitive environment in a timely manner or at all, and thus also hurt our results of operations.

Industry deregulation may facilitate the current trend toward consolidation in the utility industry but may also encourage the disaggregation of vertically integrated utilities into separate generation, transmission and distribution businesses. As a result, additional and more formidable competitors in our industry may arise, and we may not be able to maintain our revenues and earnings levels or pursue our growth strategy.

While demand for electric energy services is generally increasing throughout the United States, the rate of construction and development of new, more efficient electric generation facilities may exceed increases in demand in some regional electric markets. The start-up of new facilities in the regional markets in which we have facilities could increase competition in the wholesale power market in those regions, which could have a material negative effect on our business, results of operations and financial condition. Also, industry restructuring in regions in which we have substantial operations could affect our operations in a manner that is difficult to predict, since the effects will depend on the form and timing of the restructuring.

Our operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, site remediation and health and safety. Compliance with these legal requirements requires us to commit significant capital toward environmental monitoring, installation of pollution control equipment, emission fees and permits at all of our facilities. These expenditures have been significant in the past and we expect that they will increase in the future. Costs of compliance with environmental regulations, and in particular air emission regulations, could have a material impact on our industry, our business and our results of operations and financial condition, especially if emission limits are tightened, more extensive permitting requirements are imposed, additional substances become regulated or the number and types of assets we operate increase.

We plan to install new emissions control equipment and may be required to upgrade existing equipment, purchase emissions allowances or reduce operations. During 2002 and 2003, we expect to spend approximately $244.7 million in connection with the installation of emission control equipment at our facilities and other compliance-related measures. This amount includes $52.4 million in expenditures relating to the remaining generating assets that we expect to transfer to AE Supply from Monongahela. Moreover, environmental laws are subject to change, which may materially increase our costs of compliance or accelerate the timing of these capital expenditures.

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We may not be able to obtain or maintain all required environmental regulatory approvals. If there is a delay in obtaining or renewing any required environmental regulatory approval or if we fail to obtain or comply with any such approval, the affected facilities could be delayed in becoming operational, temporarily closed or subjected to additional costs. Further, at some of our older facilities it may be uneconomical for us to install the necessary equipment, which may lead us to shut down or reduce the operations at certain individual generating units resulting in a loss of capacity and possible significant environmental and other closure costs.

New environmental laws and regulations affecting our operations may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to us or our facilities. For example, the laws governing nitrogen oxides (No_x) and sulfur dioxide (SO₂) emissions from coal-burning plants are being re-interpreted by federal and state authorities. These re-interpretations could result in limitations on these emissions substantially more stringent than those currently in effect. Our compliance strategy, although reasonably based on the information available to us today, may not successfully address the relevant standards and interpretations of the future.

In addition, the Environmental Protection Agency, or the EPA, is developing new policies concerning protection of endangered species and sediment contamination, based on a new interpretation of the Clean Water Act. The scope and extent of any resulting environmental regulations, and their effect on our operations, is unknown.

If we fail to comply with environmental laws and regulations, even if caused by factors beyond our control, our failure may result in the assessment of civil or criminal liability and fines against us and significant capital expenditures. Recent lawsuits by the EPA and various states highlight the environmental risks faced by generating facilities, in general, and coal-fired generating facilities, in particular. For example, the Attorneys General of New York and Connecticut notified us in 1999 of their intent to commence civil actions against us for alleged violations of the Clean Air Act Amendments. If these actions were filed and if they were resolved against us, substantial modifications of our existing coal-fired power plants would be required. Similar actions may be commenced by other governmental authorities in the future.

In addition, a number of our coal-fired facilities have been the subject of a formal request for information from the EPA. Similar requests to other companies have often been followed by enforcement actions. If an enforcement proceeding or litigation in connection with this request, or in connection with any proceeding for non-compliance with environmental laws, were commenced and resolved against us, we could be required to invest significantly in new emission control equipment, accelerate the timing of capital expenditures, pay penalties and/or halt operations. Moreover, our results of operations and financial position could suffer due to the consequent distraction of management and the expense of ongoing litigation. Other parties have settled similar lawsuits.

Like other companies engaged in power generation, our operations involve the handling and use of hazardous materials and the generation of wastes. A risk of environmental contamination is inherent in

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Most of our contracts with customers do not permit us to recover additional capital and other costs incurred by us to comply with new environmental regulations. As a result, to the extent these costs are incurred prior to the expiration of these contracts, these costs could adversely affect our profitability.

The Distribution Companies have been named as defendants in pending asbestos litigation involving multiple plaintiffs and multiple defendants. In addition, asbestos and other regulated substances are still present and may in the future continue to be located at AE Supply facilities where suitable alternative materials are not available. Also, although AE Supply did not contractually assume any liabilities for asbestos claims or any other environmental claims when the Distribution Companies transferred generating assets to it, AE Supply may be named as a co-defendant with the Distribution Companies in pending asbestos claims involving multiple plaintiffs. AE Supply believes that it uses and stores all hazardous substances in a safe and lawful manner. However, asbestos and other hazardous substances are currently used and will continue to be used at AE Supply facilities, which could result in actions being brought against AE Supply, claiming exposure to asbestos or other hazardous substanc es.

Since May 2001, our largest union representing over 1,100 of our employees has been working under an expired contract. While we are in negotiations with the union covered by the expired agreement and we do not currently anticipate any problems in reaching a new agreement, there is a risk that a new agreement may not be entered into without work interruptions or other pressure tactics. Any lengthy work interruptions could reduce our ability to meet customers' needs and materially and adversely affect our revenues or increase our costs.

If we are unable to obtain external financing at rates and on terms we determine to be attractive, we may be unable to fund our growth and to meet the cash needs for our operations.

In the past, to meet ongoing cash needs for operating expenses, the payment of interest, retirement of debt and for our acquisition and construction programs, we have used internally generated funds (net cash provided by operating activities less dividends) and external financings, such as debt and equity offerings, bank credit and lease arrangements. Our business continues to be capital-intensive and achievement of our development targets is dependent, at least in part, upon our ability to access capital at rates and on

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AE Supply will have substantial indebtedness, which could restrict its activities and could affect its ability to meet its obligations.

AE Supply incurred substantial indebtedness to finance its acquisitions of the Energy Marketing and Trading division and the Midwest Assets. AE Supply anticipates incurring additional substantial indebtedness to support future acquisitions and capital expenditures and to maintain working capital. AE Supply had, as of December 31, 2001, total indebtedness of approximately $2.42 billion.

In order to accommodate the changing nature of AE Supply's business, we needed and obtained waivers and amendments of certain covenants contained in up to $1.7 billion of Supply's credit facilities and lease documents. Future indebtedness may be on terms that are more restrictive or burdensome than AE Supply's current indebtedness. This may negatively affect its ability to operate its business and have a material adverse effect on its ability to acquire, construct or develop new facilities.

AE Supply's level of indebtedness may have important consequences, including:

     -  making it more difficult to satisfy its obligations under outstanding notes;

     -  limiting its ability to borrow additional amounts for capital expenditures, future acquisitions, significant working capital requirements to conduct its risk management, wholesale marketing, fuel procurement and energy trading activities as well as for other corporate purposes;

     -  limiting its ability to use operating cash flow in other areas of its business, such as for capital expenditures and future acquisitions, because it must dedicate a substantial portion of these funds to service its debt;

     -  limiting its ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, including increasingly stringent environmental regulations; and

     -  subjecting it to financial and other restrictive covenants with which it may fail to comply, which could result in an event of default.

AE Supply's ability to meet its payment obligations under its indebtedness, including outstanding notes, and to fund capital expenditures will depend on its future performance. AE Supply's future performance is subject to regulatory, economic, financial, competitive, legislative and other factors that are beyond its control and are discussed elsewhere in these risk factors. Its cash flow from operations may not be sufficient to meet all of its payment obligations under its debt, including the outstanding notes, or to fund its other liquidity needs.

Provisions of our bylaws, our stockholder rights plan and anti-takeover provisions of Maryland law could make it difficult for a third party to acquire control of us. As permitted by Maryland law, our bylaws provide for a classified board, with board members serving staggered three-year terms. We also have

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In response to the September 11, 2001 terrorists' attacks on the United States and the ongoing war against terrorism by the United States, the financial markets have been disrupted in general. Additionally, the availability and cost of capital for our business and that of our competitors could be adversely affected by the bankruptcy of Enron Corporation. These events could constrain the capital available to our industry and could adversely affect our access to funding for our operations, the demand for and pricing of our products and the financial stability of our customers and counterparties in transactions.

     Prior to 1978, the FERC, pursuant to the dictates of the Natural Gas Act (NGA), established prices for natural gas. Interstate pipelines purchased gas at the wellhead and delivered that gas at regulated rates to local distribution companies (LDCs) such as Mountaineer and West Virginia Power. The LDCs, in turn, distributed gas to industrial, commercial, and residential customers at rates regulated by the states, which permitted pass through of the interstate pipeline costs (including both the cost of the gas commodity itself as well as the pipelines' delivery costs). There was little choice for LDCs in either the market for natural gas or transportation capacity.

     In Order No. 636, issued in 1993, the FERC found that the pipelines' provision of a bundled sales service had anticompetitive effects that limited the benefits of open access service and wellhead price decontrol. As a result, the FERC required pipelines to separate their sales of gas from their transportation service and to provide comparable transportation service to all shippers whether they purchased gas from the pipeline or another gas seller. The FERC further adopted initiatives to increase competition for pipeline capacity in order to reduce the prices paid for transportation and ultimately the overall price customers pay for gas. The FERC allowed firm holders of pipeline capacity to resell or release their capacity to other shippers and required pipelines to permit shippers to use flexible receipt and delivery points. Enabling firm shippers to resell their capacity created competitive alternatives to purchasing pipeline services. The ability to use flexible receipt or delivery points also expanded the alternatives available to buyers of capacity because it meant that buyers were not restricted to using the specific geographic (known as "primary") receipt or delivery points in the releasing shipper's contract.

     As a result of the foregoing, as well as numerous state open access and unbundling efforts, LDCs began to contract separately for (1) gas supplies in the production areas or basins, and (2) transportation service from pipelines. Large industrial customers began to do the same. Market centers began to

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     On February 9, 2000, the FERC issued Order No. 637 that was intended to (1) provide new economic opportunities for industry participants (including providing captive customers with the opportunity to reduce their cost of holding long-term upstream interstate pipeline capacity), and (2) improve efficiency within the Order No. 636 open access gas transportation marketplace, while still protecting against the exercise of market power.

     Today's natural gas market continues to change, and is substantially different operationally and economically from the market in 1993 or even 2000. Upstream and downstream wholesale markets are maturing. As part of this process, both upstream and downstream market centers and gas trading points are increasing in number, providing shippers with greater gas and capacity choices. The financial marketplace has developed a myriad of financial derivative contracts dealing with natural gas that better enable the contracting parties to hedge against price risk. Electronic commerce has grown rapidly, providing greater liquidity in commodity markets, with the promise of providing such liquidity in the transportation market as well. The natural gas industry is relying on self-regulation to develop standards for business and electronic processes that create greater efficiency in moving gas across the integrated pipeline grid. There is greater integration between the natural gas and the electric generation market, with gas usage for power generation expected to grow substantially in both the near and long-term future. Residential unbundling at the state level is well underway nationwide which may provide the opportunity for small commercial firms and residential customers to purchase their own gas supplies in a competitive market.

     The electricity supply segment of the electric utility industry in the United States is becoming increasingly competitive. The national Energy Policy Act of 1992 deregulated the wholesale exchange of power within the electric industry by permitting the FERC to compel electric utilities to allow third parties to sell electricity to wholesale customers over utilities' transmission systems. Allegheny continues to be an advocate of federal legislation to remove artificial barriers to competition in electricity markets, avoid regional dislocations, and ensure a level playing field. In addition to the wholesale electricity market becoming more competitive, certain states have taken active steps toward allowing retail customers the right to choose their electricity supplier.

     Allegheny is at the forefront of state-implemented retail competition, having negotiated settlement agreements in all of the states that the Distribution Companies serve. Pennsylvania, Maryland, Virginia and Ohio have retail choice programs fully in place. In 2000, West Virginia's Legislature approved a deregulation plan pending additional legislation regarding tax revenues for state and local governments and allowing implementation. No final legislative action was taken in 2001 regarding implementation of the deregulation plan. Although the West Virginia Legislature may consider the plan in 2002, the current climate regarding restructuring makes this unlikely. The future of competitive choice in West Virginia is therefore uncertain.

     The regulatory environment applicable to AE's generation and T&D businesses will continue to undergo substantial changes on both the federal and state level. These changes have significantly affected the nature of the electric industry and the manner in which its participants conduct their business. Moreover, existing statutes and regulations may be revised or reinterpreted, new laws and regulations

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     In response to the occurrence of several recent events, including the bankruptcy of Enron corporation, the September 11, 2001, terrorists' attacks on the United States, and the ongoing war against terrorism by the United States, the financial markets have been disrupted in general, and the availability and cost of capital for Allegheny's business and that of competitors could be adversely affected. These events could constrain the capital available to the industry and could adversely affect Allegheny's access to funding for its operations, the demand for and pricing of its products, and the financial stability of its customers and counterparties in transactions.