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Executives

Max Kuniansky - Executive Director of IR and Corporate Communications

Paul J. Evanson - Chairman, President and CEO

Kirk R. Oliver - Sr. VP and CFO

Analysts

Greg Gordon - Citigroup

Daniel Eggers - Credit Suisse

Ashar Khan - SAC Capital

Vic Khaitan - Deutsche Asset Management

Lasan Johong - RBC Capital Markets

Ivana Ergovic - Jefferies & Co

Neil Stein - Levin Capital

Ameet Thakkar - Deutsche Bank Securities

Allegheny Energy, Inc. (AYE) Q3 FY08 Earnings Call November 3, 2008 1:00 PM ET

Operator

Good afternoon, my name is Kevin I will be your conference operator today. At this time I would like to welcome everyone to the Allegheny Energy Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-answer session. [Operator Instructions].

And now I'll like to turn the call over to Max Kuniansky, Executive Director of Investor Relations and Corporate Communications. Sir, you may begin.

Max Kuniansky - Executive Director of Investor Relations and Corporate Communications

everyone and thanks for joining us. If you have to leave the call before it's over, you can listen to the taped replay. It's available until midnight on November 10th and you can listen to it by telephone, on our website or by podcast.

Some of our statements will be forward-looking. These statements involve risks and uncertainties and are based on currently available information. Actual results may differ significantly from the results in the outlook we discuss today. Please refer to our earnings news release and our SEC filings, regarding factors that may cause actual results to differ from the forward-looking statements made on this call.

Our presentation includes some non-GAAP financial measures. On our web site, you'll find the reconciliations required under the SEC's Regulation G. After our prepared remarks, we'll take your questions. We ask that you try to limit your questions to two each so that we have time to get to as many of you as possible.

And now, let me introduce Paul Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy.

Paul J. Evanson - Chairman, President and Chief Executive Officer

afternoon, everyone. And thanks for joining us. We hope this new time works well for you. GAAP basis earnings for the third quarter of 2008 were $89 million or

$0.52 per share. Excluding net unrealized losses of $4 million associated with economic hedges that don't qualify the hedge accounting, adjusted earnings were $0.54 per share compared to $0.67 in the third quarter of 2007. Increased coal prices and mild weather were the key reasons for the lower earnings year-over-year.

These factors were partially offset by favorable market crisis. Availability at our supercritical power plant was 90% for the third quarter and is now 86% year-to-date on track for the best annual performance in Allegheny's history. Our unplanned outage factor in the third quarter was essentially flat compared to the same period last year despite two discretionary maintenance outages in September. As we move toward the end of the year top-quartile performance of 88% still possible but we'll have see a further reduction in unplanned outages to achieve those.

Now, before I discuss the business highlights for the quarter, let me spend a few minutes talking about commodity prices, the financial markets and their impact on Allegheny. Third, we've seen natural gas prices drop significantly over the last few months. This in turn has reduced power prices and PJM. Coal prices have also decreased but not as sharply as gas prices.

As a result the dark spread narrowed in the third quarter. But based on forward prices is expected to improve over the next few years. The contraction in the dark spread has a more limited impact on our gaining, since most of our generation output and coal requirements have already been hedged through 2010.

For 2009, we have now increased our percentage of coal hedge to 99% and generation output hedge to 85%. We've updated our coal contracting position which remained well below current market prices and represent a significant asset of the company.

Secondly, as to the regulated delivery business, recessions generally reduce world growth and customer usage. But since electricity is an essential service the usage reductions are seldom large For example, if we look at Allegheny's experience over the three recessions since 1980. In only one year did we experience a decrease in oil growth and that decrease was more to the significant decline in the steel industry in Southwestern Pennsylvania at that time.

Finally, recessions highlight the importance of a company's liquidity and financial position. At Allegheny, we've been focused on strengthening our financial condition over the last five years. We achieved investment grade, credit rating in May '07 and we've continued to strengthen that position since then. We do very little energy trading except the hedge, the output of our power plant. We adhere to very conservative risk management practices. We have significant unused credit facilities.

We have financing in place that will cover half of the future spending needs for our TrAIL transmission projects. And we have secured most of the costs of our Fort Martin scrubber project. We have no significant debt maturities until mid 2011. And we're considering issuing only a modest amount for first mortgage bond to cover capital spending at our regulated business.

As we complete our budgets for 2009, we are focused even more than usual on holding operating costs as well as possible and discovering non-essential capital spending wherever feasible all consistent with delivering safe reliable power. In short, we are well positioned to weather today's uncertain market condition.

Now, let me update you on some other key developments in our business beginning with transmissions; our TrAIL project has been approved in two of the three states the line crosses, West Virginia and Virginia.

In Pennsylvania, we anticipate a Public Utilities Commission decision sometime this month. We requested the Commission to defer consideration of the 36-mile segment that's needed to ensure Pennsylvania only reliability. This should allow the Commission to focus on the 1.2-mile line that connects Pennsylvania with West Virginia, the segment essential to meet the reliability needs of the Mid-Atlantic region.

This 1.2-mile is entirely within Greene County and we reached a settlement with Greene County officials last month in which those officials now support construction of the 1.2-mile line and we agreed to begin a collaborative process with them and others to evaluate alternatives for the 36-mile line.

Regarding our second transmission project the Potomac-Appalachian Transmission Highline, or PATH; let me give you two quick updates. First, in part to ease some sitting concerns we recently announced a reconfiguration of the line moving an intermediate substation to a new location in West Virginia and replacing a 500 kV segment with a single 755 kV line at the Eastern end of the project. Given the additional work required to identify the new route we now expect to file for state regulatory approval during the first quarter of 2009.

Second, PJM through its Regional Transmission Planning Group recently reaffirmed the need for the line that revised the target in service state to well laid event 2013 which is the year AE hasn't indicated before.

Now, in other regulatory matters, the Virginia Commission postponed it's evidentiary hearing until November 18th in our request to recover $73 million in purchased power cost.

The Commission has allowed us to collect the increase from customers since July pending its final decision. As you recall the Commission has already decided that our Memorandum of Understanding ends December 31st of this year and now is a very important decision. We anticipate an ultimate decision by the end of this year.

In West Virginia, we filed in late August only $173 million rate increase that cover the rising cost of fuel and purchased power. This is our first fuel case in West Virginia since energy cost recovery clause was reinstated in 2007. A hearing in the matter is set for December 1st and 2nd and we hope to receive final approved rates to be effective January 1, 2009.

Turning to Pennsylvania, last month Governor Rendell signed energy legislation that includes a number of conservation and demand side management measures. It did not address brief mitigation or the transition for market-based trade. That issue will undoubtedly continue to be debated in 2009. It remains to be seen whether that will result in passage of oil deflation.

We are now to legislative mandate the responsibility for this transition risk query with the Public Utilities Commission. Last summer, the Commission approved Allegheny's rate mitigation plan which provided to 25% maximum increases with full deferrals and interest. The PUC also approved our power procurement plan which it grant forbid under the new Pennsylvania legislation.

We'll start procuring power for 2011 next year probably beginning in the second quarter. On the environmental front, our scrubber project at the Hatfield and Fort Martin power plant remains on schedule and on budget. To-date, we've spend nearly 75% of the capital earmarked for the Hatfield scrubber and 55% for Fort Martin. We expect to tie in for each of the five units to be completed by the end of 2009.

Finally, last month, there was a change in the Chief Financial Officer position at the company; Phil Goulding resigned and Kirk Oliver joined us as Senior Vice President and Chief Financial Officer.

I would like take a minute to thanks Phil for his contributions to Allegheny; Phil joined us in 2003 and was named CFO in July '06. He's been a valuable contributor throughout this period and I wish him the best in his future endeavors.

Kirk, who was most recently a Senior Executive at Hunt Power, prior to that he spend eight years at TXU Corporation, beginning as a Treasurer and then serving as Executive Vice President and Chief Financial Officer. His experience also includes 11 years in Investment Banking with Lehman Brothers. His broad financial and utility industry experience we'll like Kirk a strong contributor to Allegheny.

I am delighted to have him on our management team. So with an experienced senior management team, our hardworking employees, our solid financial position, the strength of our core businesses and our growth investment, we are well positioned to achieve our long-term goal and further enhance shareholder value.

Now I will turn the call over to Kirk.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Thank you, Paul and good afternoon everyone. Let me begin by saying that I am excited for the opportunity to join Allegheny and I will look forward to working with all of you. Today, we reported net income of $89 million for the third quarter of 2008 compared to $115 million a year ago. Earnings were $0.52 per share compared to $0.67 in the same period a year ago.

Adjusted earnings per share for the quarter excluding net unrealized losses associated with economic hedges that do not qualify for hedge accounting were $0.54. There were no adjustments to net income in the third quarter of 2007. Net unrealized losses associated with hedging activities were $4 million, net unrealized losses included $107 million loss on financial transmission rights and $81 million gain on power hedges and a $22 million gain on our current river pipeline hedges.

All these items were driven by substantial decreases in gas and power pressures during the quarter. For the nine months ended September 30th, earnings were a $1.79 per share on an adjusted basis as compared to a $1.78 per share last year.

Let me focus in more detail on this quarter's results. First, I'd like to summarize some of the key factors that impacted the change in adjusted earnings per share. Higher coal prices at AE Supply hurt EPS by $0.14. Our fully delivered coal price increased about 20% to $49 per ton. The net effect of market prices including marketing, trading and hedging activities increased EPS by $0.05.

Milder weather associated reductions in power price volatility and decreased spreads negatively impacted planned output at our gas and pump stores plants resulting in a $0.03 per share increase in earnings.

Unregulated coal planned output was flat compared to the prior year. Lower customer usage decreased earnings by $0.03 largely due to milder weather. Higher generation rates in Pennsylvania increased earnings by about $0.01 per share. This is the net effect of our scheduled 8% increase in generation rates, and the negative impact of the expiration of the Pennsylvania stranded cost recovery surcharge. All other factors increased earnings by $0.01 pee share. In total adjusted earnings per share decreased $0.13.

Now, I'd like to discuss third quarter year-over-year changes in each of the primary lines of the income statement. Here's an overview of the changes on a GAAP and adjusted basis, beginning with the top-line revenues increased by $7 million after adjusting for the previously mentioned net unrealized loss.

Let me summarize the key components impacting revenue. Decreased generation output primarily at our gas and pump storage plants reduced revenue by $19 million. Market prices including marketing, trading and hedging activities increased third quarter revenue by $19 million. Market prices benefited from increases on both capacity and energy prices.

Capacity prices increased from $41 per megawatt day in the third quarter of 2007 to $112 per megawatt day this year. Energy prices in Arizona averaged by about $72 per megawatt hour a 28% increase over the third quarter of 2007 prices.

Increased sales to third parties by our supply business benefited revenue by $11 million. This resulted from supply, selling energy and associated services to the PJM market and fit with it's affiliate Allegheny Power. This increase in revenue has offset purchased power expense. Milder weather and reduced customer usage decreased T&D revenue by $8 million in the quarter. Cooling degree days were 22% a low in the third quarter of 2007 and 8% below normal. Transmission expansion projects, added $6 million to revenue this quarter.

Moving now from revenue to expenses, fuel expense was up $54 million, period-to-period; this is primarily deep driven by higher coal and emission costs.

Purchased power costs increased by $14 million in the third quarter of 2008, largely due to increases in Allegheny Power's third-party purchases of energy and associated services.

Deferred energy decreased costs by $22 million, primarily due to our West Virginia energy clause. O&M decreased by approximately $3 million. Decreased generation and maintenance work was partially offset by increased costs related to storm restoration expenses.

Continuing with the income statement, other income decreased $10 million, primarily as a result of a gain on a real estate transaction in the third quarter of last year. Interest expense was down $2 million due to lower interest rates and increased capitalized interest associated with our Hatfield scrubber project. Other interest includes increases associated with securitized debt.

A net result of all these items was a $45 million decrease in adjusted pre-tax income. Our effective tax rate this quarter was 33% which compares to 37% for the same period a year ago. We expect our effective tax rate for the year 2008 to be approximately 35%. Long-term, we expect our annual rate to be about 38%.

That concludes my discussion of the income statement.

Moving onto cash flow, net cash flow from operations was $275 million in the quarter, a $48 million decrease compared to the third quarter of 2007. This was largely due to changes in working capital and lower earnings.

Capital expenditures were $236 million including a $156 million of spending on our scrubber and transmission expansion projects, free cash flow excluding capital expenditures for the Fort Martin scrubbers which are funded through securitization proceeds, was a positive $101 million for the quarter. Year-to-date free cash flow excluding expenditures for the Fort Martin scrubbers is slightly negative.

Our current estimate for 2008 capital expenditures is about $1.1 billion. This is down $200 million from our earlier estimate of $1.3 billion due primarily the timing of scrubber and transmission expansion spending.

Our estimate for 2009 capital expenditures is about $1 billion, down $200 million from our previous estimate of $1.2 billion. This reduction is primarily due to the timing of our transmission spending and reduced discretionary expenditures. Partially offset by the shift in scrubber spending from 2008 to 2009.

Our credit metrics remained strong. Let me give you additional detail on our liquidity position.

In total, we have about $1.5 billion of available liquidity. We have about $100 million in cash, $700 million in undrawn revolver capacity and $700 million in project specific financings. All of our credit facilities are well diversified; the company has low re-financing risk and no significant debt maturities till 2011. We are considering issuing a modest amount of first mortgage debt to cover capital expenditures associated with the unsecuritized portion of the Fort Martin scrubber and other items.

Before we cover the outlook for next year, I would like to briefly comment on the fourth quarter of this year. Relative to the fourth quarter of 2007, we expect a meaningful improvement in availability. Supercritical availability in the fourth quarter of 2007 was 72%, largely due to multiple planned outages. There are no planned outages in the fourth quarter of 2008.

Based on current power prices, we expect to benefit from improved availability of $30 million. We expect our fuel expense to be higher, power prices including hedging and marketing contracts are expected to be reasonably flat but capacity prices will be higher than last year. Although the impact of current economic conditions on fourth quarter customer usage is uncertain based on the industry we would not expect a meaningful decline in usage versus 2007.

Turning to the outlook for 2009 here is an overview of the key earnings drivers for 2009 compared with the adjusted 2008 results. The lift is now complete there will undoubtedly be some impacts both positive and negative that we have not addressed here. But it is a useful framework for thinking about the coming year. Increasing out rates in Pennsylvania should add $140 million.

This reflects our scheduled increase in generation rates net of the negative impact of the exploration of the Pennsylvania stranded cost recovery surcharge. Our Maryland residential customers will transition to market based rates which will result about $90 million. This increase is made up of both energy and capacity revenues. The energy estimate is based on current forward market prices and the capacity revenues are based on a established RPM auction results.

The $120 million for Virginia purchased power represents full recovery of our purchased power cost for all of 2009, while we are already collecting $73 million subject to refund for the period of July 1, 2008 through June 30, 2009, we have been reserving against these revenues in 2008. Actual purchased power recovery is dependent on Commission approval.

Transmission expansion projects including TrAIL, other PJM directed projects and to a lesser extent PATH are expected to help income by about $20 million in 2009. This benefit is dependent on timing of state approvals.

Higher capacity prices excluding capacity benefits in Maryland and Virginia should result in a $20 million increase; this represents the $50 per megawatt day increase in capacity prices on 1,100 megawatts of capacity.

We will realize a cash benefit of $30 million from our Kern River Pipeline project. We put hedges in place in the second quarter of 2008 to lock in this benefit.

Turning now to cost; we continue to focus on controlling O&M cost. We will strive to maintain 2008 O&M spending levels in 2009, excluding O&M related to the new scrubbers, our transmission expansion projects and other programs that will be recovered in revenues to formula rates.

We expect higher coal prices to impair payee supplier by a $120 million, our 2009 delivered coal prices estimated to increase by about $9 per ton.

The impact of a scrubber tie in outages is projected to be about $10 million. These tie in outages are expected to take approximately three weeks per unit to 2009. Operating our new scrubbers will increase O&M and fuel related cost but will reduce SO2 allowance cost.

The net effect is a reduction in pre-tax income of $10 million in 2009. Interest expense, excluding the effects of securitization and transmission debt both of which have offsetting revenue, should be higher by about $20 million, primarily due to additional borrowing and to fund capital projects and to a lesser extent an increase in interest rates.

Depreciation expense is expected to increase about $10 million in 2009, primarily due to the completion of our scrubber projects. Other factors such as market prices, weather and customer growth will undoubtedly affect our results in 2009.

Let me give you some additional information on market prices. We have hedged over half of our market facing generation in 2009, through marketing contracts and financial hedges and now have about 5 million megawatt hours of unhedged generation.

Based on the locked-in prices of our hedges in current forward market 2009 pricing will be comparable to what we realized in 2008. However, market prices have been extremely volatile and could have an impact on our 2009 results either positive or negative.

These are the drivers that impact pre-tax income. Let me take a moment to discuss taxes, as I mentioned we expected our effective rate in 2008 to be about 35%. However, our 2009 tax rate is expected to more inline with long-term expectations of about 38%.

And with that let me turn it back to the operator for questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. And your first question comes from the line of Greg Gordon from Citi. Your line is open, sir.

Greg Gordon - Citigroup

Thank you, guys. So when I look at the earnings drivers on page 42 just to be clear the Maryland and Virginia gross margin numbers include energy and capacity and the $20 million capacity price number is on open positions where energy and capacity are being sold independently?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right. That's exactly right Greg, we kind of reclassified it to make it a little simpler and clear about it. I think we might have raised some confusion on it. $30 million was the capacity revenue that we have locked-in for last year going up to a $120 million and that's of course locked-in not dependent on energy but the last year's $30 million was related to about 1,100 megawatts goes up to $50 million. And the additional $70 million comes from Virginia and Maryland and we decided to show that up above on the drivers in terms of market prices. So the total benefit clearly remains at the $120 million but we now have it in actually three different pieces now on the driver slot.

Greg Gordon - Citigroup

And when are going to get, hopefully a final decision vis-à-vis Virginia. What are the milestones we are looking forward at this point?

Paul J. Evanson - Chairman, President and Chief Executive Officer

The hearing is slated for, I think it's late November of the SEC, the commission down there, we will hope to get a decision by year-end. In the mean time, as you know we're still collecting the original $73 million, that we've been collecting since July of this year.

Greg Gordon - Citigroup

My understanding is the staff position would give you a defined increase in revenue through the middle of next year; and then you would file again for changed subsequent to that based on whatever pricing the utility receives in its next contract?

Paul J. Evanson - Chairman, President and Chief Executive Officer

You're right. The decision take us through June 30th of '09, and then we would have to be back in filing for the balance of the year. So what we show there is a driver is our estimate for the full year going through December '09.

Greg Gordon - Citigroup

Okay. Looking at coal prices its that I have seen CSX real coal pricing coming down. What are you guys seeing in terms of real sort of offers to future coal in the '10 and '11 timeframe when you are less hedged, what kind of pricing are you looking at... as a versus compare let's say to the end of the first quarter?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, I think the prices has clearly softened, things peaked in mid-year and if you just looked at the NYMEX, I think it's probably down from June probably 35% - 40%. So we contract to be at one contract we've done in the last three months and it was really just a million tons going out for a four or five year period.

And what we thought was a pretty good price below what those market prices are. I think from our standpoint we're now fully hedged coal in '09. And I think we're just going to wait a little while before we do anymore contract thing for '10 and beyond just to see where prices settle in at. Depending on how far reaching this recession has and the impact globally. I think we'll probably likely see my senses some further softening in coal prices from here.

Greg Gordon - Citigroup

Last question, what do you think the timing will be for any sort of further clarity on rate mitigation in Pennsylvania? Is this something that we'll have to wait for another 12 to 18 months? Or do you think there'll be an opportunity for investors to see some clarity on that issue in a shorter timeframe?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well we'd all like some clarity especially if its clarity that we like. And as you know this has being going on for 18 months, just like some prior drills when every thing end of budget session or the end of legislative session and in September I would say there was quite a push. The Governor himself made a great effort to try to get legislation through, they did pass energy efficiency and conservation but as you know nothing on rate mitigation.

I would expect this issue to continue to be debated in the legislature in '09 and continuing in '09 and until there is a point that either we have legislation or the companies start going to market and PPL would be the first in one in January 10th. I do think the issue may come down a tad in seriousness because most of the politicians have calculated these increases from time power prices were at their peak in June.

So they have come down a bit since then. So I think the percentages that people were worried or was and if there is no legislation ultimately it reverts back to the PUC and I think the PUC is trying to meet its accountability for that with decisions on PPL and certainly with that decision about phasing of price increases in '11 and beyond. So unfortunately, I'd like to give you an answer that says year-to-date but I think this is going to be with us for as long as we have politicians in Harrisburg.

Greg Gordon - Citigroup

Thank you.

Operator

Your next question comes from Dan Eggers from Credit Suisse. Your line is open.

Daniel Eggers - Credit Suisse

Good morning, guys. Paul, can you just talk a little bit about supercritical availability relative to utilization it seems like the spread between the two is a little wider than normal. Did you guys, you hold back on one end of the prices as hard as was available because the fact that people want passenger real cost of coal in the market this summer?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, I'd say we certainly have done a little bit of that, yes. I'd say generally there is a pretty close relationship between the availability and the dispatch and it's pretty straightforward. But I think we've... there are a whole member of players in PJM they have different assets, different cost structures, different fitting strategies and some are regulated and unregulated and some people just fit in at more strong place. So you see sometimes strange things and we've seen some strange things particularly when coal prices went crazy and spiked etcetera. So I think, things hopefully were very fact of the norm now and will be more consistent. And we're working also Dan, how we're good in our plan to make sure that we're optimizing our own situation.

Daniel Eggers - Credit Suisse

Remind me on the Maryland residential customers going to market. I've heard about 3.7 million megawatt hours transition, was that the right number of Maryland load is going to go from kind of this whole low service rate to a market rate this year?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

It's actually about 3.5 million.

Daniel Eggers - Credit Suisse

3.5 million. Okay. And if I... my old numbers said that there was about $37 in megawatt hours, so, before you haven't adjust for the capacity number it looks like you guys are implying a market rated between $60 and $65 in megawatt hour maybe a little less than that in your guidance is that reasonable amount?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's right Dan, well between $60 and $65.

Daniel Eggers - Credit Suisse

Okay. And that is based on what you guys are seeing in the forwards today or what been did you guys see those prices?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's based on current price expectations.

Daniel Eggers - Credit Suisse

Okay. And then I guess the other thing on this, the roundup of 2008 earnings guidance numbers, if I go back to the last quarter I think you guys were showing about a $90 million pre-tax improvement year-on-year, we looked to the third quarter that came in below and then we see a modest improvement in the fourth quarter based on slide 41, what all has happened from an outlook perspective between the third quarter and today that would account for some of that relative earnings forecast on a full year basis?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, I'd say Dan, its probably three main factors. One is the milder weather in the third quarter, that had a meaningful impact both on the delivery business forward and on the generation side in terms of lower output and Kirk might address that little bit later.

Secondly, the lower market prices, we've calculated we had extra availability in the year and we certainly planned on having that and we have substantially realized all of that. But the value of that has been less than what we saw given the lower market values during the year. And finally, we've seen some higher coal and other fuel costs during the year.

We had some issues on vendor performance early, we had some increased coal costs from somewhere existing contracts and frankly some of them non-coal fuel costs like lime, gypsum etcetera have also increased during this period. So I think it's a combination mostly of those three factors.

Daniel Eggers - Credit Suisse

Rightand then last question, but you think about the opening exposure you were 85% hedged on output for next year. How do you think about filling in the remainder of that as we think about 2009? Are you are going to sell of that forward or is that going to be length you are happy to live with right now?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, I think at this stage, we are probably happy to live with the... I mean its 4 million or 5 million, I think 5 million megawatt hours. And at this stage given market prices, I think we are kind of satisfied where we allow all those... we may bid on some of the contracts. But I think we're probably going to live with that.

Daniel Eggers - Credit Suisse

Okay. Thank you, guys.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay.

Operator

Your next question comes from Ashar Khan from SAC Capital. Your line is open.

Ashar Khan - SAC Capital

Good afternoon. I wanted to go back to I guess little bit of Dan's question, going back to the sheet we had at the end of the second quarter it was like plant availability 60 - 40 expansion and all that. The net number a kind of implied nearly pick up of about 120 or somewhere around that level in pre-tax income and I guess from what we have this morning, the pick up is more like 20 million - 25 million and so there's been a I would say 70 million collapse.

And I was trying to pinpoint the holes which you were going to fall, I guess plant availability you say there is another 30 to show up. So I was expecting another 30 to show up this quarter because the first half was poor and we were expecting plant availability to improve and it has improved, that seems like the availability benefit of at least 30 million or so is just kind of disappeared or didn't show up in the third quarter? And am I correct on that?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, the availability of the plants is pretty close to where we had projected to be when we started the year. We're trying to get the top quartile, we are running at about 87% year-to-date right now. So we are very close to that top quartile and we have always targeted the 88%.

The problem is short comes in that. What we have always said was the value of adding each one percentage point to availability and we have kind of historically said, that's worth $10 million per one point in availability. And we saw for example, at some points its very... usually it was getting higher than that but I think at current prices that number is probably down to the $6 level around there.

So that $10 turned out to be $6, so when you multiply that out it cut that contribution this year at least that significantly and the good news is we're getting new availability, we are really happy about that and expect it to continue. The bad news is the prices to put in some through this year, although when we look at futures yes we will back to where we thought there would have been a year ago right at this time.

Ashar Khan - SAC Capital

Okay. And then just going on to the... what has the number was $90 million on the coal prices, year-over-year increase, what is the comparable number right now for 2008 versus 2007?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

2008 versus 2007 I believe was $90 million.

Ashar Khan - SAC Capital

You're still expecting $90 million including the fourth quarter?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, we are still at about $90 million including the fourth quarter.

Ashar Khan - SAC Capital

Okay.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Maybe a little north of that.

Ashar Khan - SAC Capital

Okay. So there's not much slippage in that assumption factor that still remains around $90 million?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's right for coal. I mean that's coal cost.

Ashar Khan - SAC Capital

They are just coal cost. Okay.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

It's got drift up a little bit probably for coal and partly for some of those non-coal fuel items that I mentioned.

Ashar Khan - SAC Capital

Okay. So those are the reasons that would go above $90 million. And then if I can just go to the assumption page, the $120 million that is factored for next year, how should we look at it. Kirk, I guess if I look at the chart you gave us, we're going from like $47 to $56. So that's a pick up of like $9 million. I mean $9 and should I multiply 9 if I divide 120 by 9 I'm get to like 13 or so, is that the way to do it 13 unregulated tons?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

13 million, yes.

Ashar Khan - SAC Capital

13 times 9 is the maths. Is that the way I'm doing it right?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, you are.

Ashar Khan - SAC Capital

Okay. Thank you, very much.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay.

Operator

Your next question comes from Vic Khaitan from Deutsche Asset Management.

Vic Khaitan - Deutsche Asset Management

Hi, thank you and welcome Kirk.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Thank you, Vic.

Vic Khaitan - Deutsche Asset Management

Yes, couple of questions Paul, if I understood you correctly 2009 drivers you are suggesting; they are pretty well locked-in or there are more variability to those numbers?

Paul J. Evanson - Chairman, President and Chief Executive Officer

I would say Vic that they are pretty well locked-in plus the one big variable being Virginia purchased power we need that decision from the Commission.

Vic Khaitan - Deutsche Asset Management

But as you state, in your slide 42 it shows up almost like $250 million pre-tax pick up in '09 over '08?

Paul J. Evanson - Chairman, President and Chief Executive Officer

When you add in, you mean all the drivers?

Vic Khaitan - Deutsche Asset Management

Yes.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, that's right.

Vic Khaitan - Deutsche Asset Management

I see. And then although you are not giving '10 yet but '10 should also be reasonably predictable one given that's already known what the Pennsylvania rates will be and what the other jurisdictions are so--?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, the only thing you need to plug-in '10 is coal prices for some for the... where is our contracted position comes down from... to 70%.

Vic Khaitan - Deutsche Asset Management

Right.

Paul J. Evanson - Chairman, President and Chief Executive Officer

So you can just plug-in current market prices or better. So far we've been doing better.

Vic Khaitan - Deutsche Asset Management

Yes. No, so the real variability will come in '11 where we still don't know how much prices will be in '11 and how much Commission will be allowing you to pass on?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, that would be a big variable in '11 yes.

Vic Khaitan - Deutsche Asset Management

Yes.

Paul J. Evanson - Chairman, President and Chief Executive Officer

There will be 20 million megawatt hours in Pennsylvania potentially transitioning to market.

Vic Khaitan - Deutsche Asset Management

So I mean the main variability now is some of the coal prices and then perhaps in '11 the power prices, those are the two main variables left?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, and the Virginia decisions.

Vic Khaitan - Deutsche Asset Management

Right, right but that one is getting along okay, so hopefully that should be passed through without any pluses or minuses.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, I agree with you totally I think, but we have seen some very unpleasant surprises in Virginia of late. So lately though, with the decision that the MoU ends December '08, I am feeling really good about it.

Vic Khaitan - Deutsche Asset Management

Okay. One more question regarding transmission lines, your first benefit for the TrAIL will be, when would we start seeing the benefit of TrAIL?

Paul J. Evanson - Chairman, President and Chief Executive Officer

You may not, well we actually see the return on the investment as we spend the money. So as you have seen some in '08 already and you'll see more in '09.

Vic Khaitan - Deutsche Asset Management

But the... I mean the completion is expected to be sometime in '11?

Paul J. Evanson - Chairman, President and Chief Executive Officer

June '11, is what we are shooting for, yes.

Vic Khaitan - Deutsche Asset Management

Okay. And then perhaps will not be done until '13, so only happy until 13 and then full year in '14, is that right?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, exactly the PJM transmission group just included the TrAIL still necessary but passed they pushed out for one year.

Vic Khaitan - Deutsche Asset Management

So those are going to be the incremental income in '11, '12, '13 time period from full operation on those transmission lines?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right, right and the impact on the whole system, right.

Vic Khaitan - Deutsche Asset Management

Including some potential upside from flexibility in your powerful sales?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes.

Vic Khaitan - Deutsche Asset Management

I see okay. Thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

All right. Thank you, Vic.

Operator

Your next question comes from Annie Sal [ph] from the line of Bernstein. Your line is open.

Unidentified Analyst

Good afternoon.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Annie, [ph] how are you doing?

Unidentified Analyst

Fine, how are you? I am okay.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good.

Unidentified Analyst

I just want to clarify, did you say on the tax rate the third quarter, with this quarter's 33% versus last year's 37% and then for the whole year of '08 is this 35% versus next year of 38%?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, Annie [ph] that's correct its 33% for Q3; full year we're expecting 35% and then '08 we expect to get back to sort of more normalized rate of about 38%.

Unidentified Analyst

And can you walk me through why is this a difference?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

It's really some tax benefits that we were realizing in Q3 and then some in Q1. That we won't have going forward.

Unidentified Analyst

So a more normalized kind of tax rate 38%?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Thanks. And can you guys give some kind of coal prices outlook beyond '09?

Paul J. Evanson - Chairman, President and Chief Executive Officer

ou said beyond '09?

Unidentified Analyst

Yes.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Other than saying, I think that we have seen some significantly fall off in coal prices and in NYMEX and coal quotes in our region, they are all probably anywhere from 25% to 40%, from the summer at least, I really am not at... I wouldn't want to make predictions of what they are going to be out in '10 or '11 which is why we are at this point owing all fund contracting any additional tonnage.

As I said earlier I think my view would be, coal prices will probably be softening even further from where they are. So we are not too eager to contract now where they end up I don't really know.

Unidentified Analyst

Thank you.

Operator

Your next question comes from Riza Hettasi from Decade Capital [ph].

Unidentified Analyst

How are you guys?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good, thanks.

Unidentified Analyst

Just had a couple of follow-up question. Earlier a question was asked about the pickup of $90 million in Maryland, I recall I think it was the first quarter call where it was mentioned that part of that was replaced between $80 and $85 which was relative to the $37 or so. But then just looking at the maths from the question earlier I just wanted to sort of understand why pickup wasn't more than $90 million given that you have mentioned $80 to $85 earlier in the year?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, that is basically result of the fall offs in market prices in

PJM last... over that period of time I mean prices have fallen sharply and that's based on current prices out there at PJM.

Unidentified Analyst

Was that $80 to$85 only on a small piece of that 3.5 terawatt hours and thus the rest got replaced?

Paul J. Evanson - Chairman, President and Chief Executive Officer

No, that's the fall $80 to $85 was our estimate background and now we are estimating $60 to $65.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, that right, that's just the amount that the price... the oil and price for power came down.

Unidentified Analyst

I am sorry, okay I thought that the $80 - $85 you actually contracted at that level, back--

Paul J. Evanson - Chairman, President and Chief Executive Officer

No.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

No.

Unidentified Analyst

Okay. So that was just expectations that went down. And just to confirm the pickup in overall coal costs from '07 to 2008 was $90 million and that's on the unregulated side correct?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's on the 30 million tons, so that's on AE Supply all the unregulated coal.

Unidentified Analyst

Okay, great. And 90 million from '07 to '08 and then you are projecting a $120 million from '08 to '09?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Great. Okay, great. Thank you, very much.

Operator

Your next question comes from Zac Triber from Dussane Capital [ph]. Your line is open.

Unidentified Analyst

Most of them have been asked and answered, thank you, congratulations Kirk.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Thanks, Zac [ph].

Operator

And your next question comes from Anne Rossini [ph] from Catapult Management. Your line is open.

Unidentified Analyst

Good afternoon.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Hi.

Unidentified Analyst

Just a couple of quick questions, just some clarity you mentioned, you had done some hedging for 2009, could you just walk through that again it sounds like you have about 10 million megawatt hours open and you hedged half of that for '09, is that correct?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, that's correct. We've hedged about half of it.

Unidentified Analyst

Okay. And then you mentioned that the pricing would be relatively flat, were you comparing what you hedged out versus what you expect to realize this year or what you hedge that you have hedged half item, your expectations from market are going to be relatively finished, is any kind of color maybe you can give around of those different pieces?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

What we are saying is, with current expectations are from market and then what we hedged in, we're expecting to be about relatively flat.

Unidentified Analyst

Okay. But would it be right to assume that your hedges are slightly above where market is now given the prices have been falling or--

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

I would have to get back to you on exactly where the hedges are priced.

Unidentified Analyst

Okay. Fair enough. And then I guess the other question I have was just on the your CapEx it looks like the new... I guess slide 37, you are now seeing the CapEx is going to be $1.1 billion in '08 and $1 billion in '09 can you just give a little color on the changes, I think the K forecast was $1.3 billion in '08 and about $1.2 billion in '09, what are the pieces that are being either deferred or coming in lower than expectations?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, in '08 we have some of the scrubber capital being, some of them are being reduced and some of it moving into '09. And then we also have summer transmission expansion capitals moving into 2009 as well.

And then '09 we have... remember we have the proxy piece of TrAIL, we're moving that out that will be delayed about a year. We've reduced some discretionary spending and then some of that will be offset by capital expenditures on the scrubbers that got moved from '08 to '09.

Unidentified Analyst

Okay. So it's a little bit... mainly the scrubbers in the transmission.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's correct.

Unidentified Analyst

Okay. Thank you very much.

Operator

And your next question comes from Lasan Johong from RBC Capital Markets. Your line is open.

Lasan Johong - RBC Capital Markets

Thank you. Good afternoon. Couple of quick question Virginia is still from my understanding uncertain as to where it's going to go in terms of its kind of regulatory framework. Can you comment on what you are seeing over there, and if you are making any plans to take action in one direction or the other?

Paul J. Evanson - Chairman, President and Chief Executive Officer

You are taking about Virginia or--?

Lasan Johong - RBC Capital Markets

Yes, Virginia, did I say West Virginia, sorry Virginia.

Paul J. Evanson - Chairman, President and Chief Executive Officer

No, you said Virginia, no, I mean Virginia of course went from kind of regulated to deregulated, now it's back to fully regulated effective January '09. And our biggest issue in Virginia is the recovery of our purchased power cost, which because of that Memorandum of Understanding we entered into back in 2000 we've been unable to get any increase.

And that's what our major rate cases is all about. We'll be otherwise $140 million short and in '09 absent any recovery. The good news is the Commission already decided that they will end year end December '08. So we'll getting some recovery up to $440 million for the full year. So that's the major issue for us. It's not quite like going back to re-regulation. That's a secondary issue for us.

Lasan Johong - RBC Capital Markets

Any chance, you might want to do something strategic with that piece?

Paul J. Evanson - Chairman, President and Chief Executive Officer

There may be. I think our first issue is we want to make sure we get full and fair rates in recovery and until that time, we're really not in a position to do much elsewhere that even if we wanted to do that.

Lasan Johong - RBC Capital Markets

Fair enough. In Maryland, I think there was if I am not mistaking it credit that was being accrued for customers in preparation for the '09 market rates. Is there kind of a structure on how this is going to be phased in for the customers?

Paul J. Evanson - Chairman, President and Chief Executive Officer

My sense is that credit has now ended and it should not have an impact on our earnings in '09.

Lasan Johong - RBC Capital Markets

So it's completely gone and--

Lasan Johong - RBC Capital Markets

Perfect.Couple of questions on TrAIL and PATH. Any revisions in cost estimates?

Paul J. Evanson - Chairman, President and Chief Executive Officer

None in TrAIL, no, with the qualification that I think Kirk mentioned on the Pennsylvania piece of it, which was in total was about a $197 million, that it was 36-miles to serve Pennsylvania only reliability and with that the Pennsylvania Commission to separate that from the 1.2-miles that's critical to West Virginia and Virginia.

So that's a $197 million, it will probably I think this is... that's worth we will have to get done and might not get done in the same methodology that we had or the same route. But it would built and for our CapEx planning we are just put off that entire $197 million until '09 and thereafter.

Lasan Johong - RBC Capital Markets

I see.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Except to the TrAIL spending is exactly where we thought it would be and the same thing with the PATH spending although we have done some reconfiguration tentatively of looking like it's going to be the same $1.2 million for us that we talked about originally.

Lasan Johong - RBC Capital Markets

Got it. One last question, mentioned that discretionary spending was being I guess flattened out is best way to look at it, does this involve growth with customers? Is it because of industrial consumption going down? Can you give us a little color on what that discretionary spending is?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, well at Allegheny Power we clearly... the cost of capital with regard to restore power and to hookup new customers is whatever it is. The rest has to do with the reliability improvements of one kind or another and we often regularly spend and increase the spending to make sure our system maintains that reliability.

And some of those and looking at them we decided we could just defer a little bit and we are deferring what we can on the Allegheny Power side. And similarly on the Allegheny Supply side; the unregulated there is a lot of spending you could always do and we have been really very, very intent to get to that availability number. But as I said earlier when you look at the payback on that availability number which is now almost half of what it was although I think longer term it will be back to those original numbers.

But it's as maybe we can defer some of those expenses for a reasonable period to time. So we are looking at both sides of the business spend.

Lasan Johong - RBC Capital Markets

And impact of industrial consumption of electricity in your areas?

Paul J. Evanson - Chairman, President and Chief Executive Officer

When you strip out the weather, it's some decreased but I wouldn't say at this point we're seeing a huge amount.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Most of all we have been able to see has been with weather the heating degree are... degree days I should say were down about 22% this quarter versus 2007. We have very little humidity. With the lowest humidity we have had here in the area in about six years. So we just had a really pleasant summer and very big impact from weather.

Lasan Johong - RBC Capital Markets

Great thank you. Welcome, Kirk.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from Ivana Ergovic from Jefferies. Your line is open.

Ivana Ergovic - Jefferies & Co

Hi, good afternoon.

Ivana Ergovic - Jefferies & Co

As I looked at slide 41... page 41 drivers for the fourth quarter and if I add those up I come up with a estimate of $0.54 for the fourth quarter. I am just wondering is there any... there's no contribution of estimate going to region from Pennsylvania rate transmission capacity, lower interest because they are missing on the page or should we just assume this is the only drivers for the quarter?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, you can assume there is no impact on those things, they are not pick up on the pay capacity as in the market price number. I remember we've said we expect market pricing to be relatively flat except for capacity going up. With respect to Pennsylvania I mentioned that there is a stranded cost recovery surcharge. There were two securitizations there and we've stopped collecting the transition charge on the first one which was flowing through income.

The second one is a make up if you will because of the cap rates we had and that one is offset by regulatory asset amortization of regulatory asset. So even though the cash impact is nil, there's an earnings impact which offsets the Pennsylvania rate increase that you would be looking to see here.

Ivana Ergovic - Jefferies & Co

Okay. Thanks. And another thing do you know what was the average or what is your estimated average realized price for the excess power in 2008?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

I am sorry, now I don't have that.

Ivana Ergovic - Jefferies & Co

Okay. Thank you.

Operator

Your next question comes from Neil Stein from Levin Capital. Your line is open.

Neil Stein - Levin Capital

Why don't you talk about this Maryland situation and in particular the calculations you have for the '09 growth drivers. You started with I guess $37 per megawatt hour which is what you have been charging and charging this year. And then, I believe that the full requirement price, is that correct or is that energy only price?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's full requirements price.

Neil Stein - Levin Capital

Okay. And then, you are talking about going to something in the range of $60 to $65. But my understanding is that's by a good approximation of flat energy prices for 2009?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

No, that would be all in price.

Neil Stein - Levin Capital

That's will be an estimate of full, okay.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

That's a full requirements price.

Neil Stein - Levin Capital

And what is the reference that we should be thinking about because when I look at kind of where fab prices are for PJM last I get around 66, so is it a discount to the PJM west hub?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes. It's a discount to the PJM west hub, and then what you have to think about is that's about, it's about it represents about 700 megawatts of capacity, you can kind of backend of the energy component because you know the capacity price.

Neil Stein - Levin Capital

Is that roughly kind of a basis spread you can give me discount to the PJM versus the hub price?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, I think around $10.

Neil Stein - Levin Capital

$10, okay. And then with respect to what you sold and what you didn't sell I recall in the first quarter call you'd talked about selling 700,000 megawatt hours at around to $80 to $85 did we hear that incorrectly?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

I am sorry, Neil 700,000 of what?

Neil Stein - Levin Capital

I recall on the first quarter call you talked about selling forward 700,000 megawatt hours at a price of around $80 to $85 and the 1000 options that had already been completed?

Paul J. Evanson - Chairman, President and Chief Executive Officer

That was the commercial industrial contract.

Neil Stein - Levin Capital

Okay. So there was some power sold forward at that $80 to $85 level? Am I right or maybe if there sum net being sold forward or less than that is I'm just kind of confused just based on what I have heard?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Well, the sum net is been sold forward, and then there are sum net that that was not sold forward for which we got market.

Neil Stein - Levin Capital

Okay. And then maybe blended all in with you sold sum net $80 to $85 and sold some for less than that, but did it all averages to $60 to $61 is that?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Yes, and then you have to look at the fact that there is on peak and off peak and it's kind to hard to quantify all of it.

Neil Stein - Levin Capital

Okay. And just also going to the fourth quarter drivers you talked about special maintenance expense falling off over in both in the third quarter and I guess more so in the fourth quarter 2008 versus 2009 or, excuse me 2007 versus 2008?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right.

Neil Stein - Levin Capital

But that's not cited as a driver here?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, we could have but we really have grouped that into a total O&M expenses. So when you look at the total which went up non-special maintenance in the fourth quarter you have not a significant movement. When you look at the total O&M for the year you recall in the beginning of the year we had estimated $20 million as an increase in O&M and we probably going to end up the year at no more than $5 million. So we have done some significant cuts in O&M.

Neil Stein - Levin Capital

Okay. And I guess for now that's it. Thanks.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay. Thanks Neil.

Operator

Your next question comes from Ameet Thakkar from Deutsche Bank. Your line is open sir.

Ameet Thakkar - Deutsche Bank Securities

Good afternoon.

Ameet Thakkar - Deutsche Bank Securities

Hi, just had a quick follow-up question to Neil's question regarding the basis differential that you guys have seen in Maryland. I think you guys just mentioned that it was about $10 a Megawatt hour, it was a good number to work with.

Now is that basis differential $10. Is that just specific to kind of your Maryland load or should we be thinking about kind of all of your assets kind of realizing the price $10 behind the PJM west hub power price regardless of what load pockets they serve?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

No, I'm sorry if I missed all before that, the $10 is more with respect to PJM West. Maryland basis is more around $5.

Ameet Thakkar - Deutsche Bank Securities

Okay.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

But you know that moves up and down and changes all the time.

Ameet Thakkar - Deutsche Bank Securities

Okay. And how have you guys seen the basis move, thus part of this year?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

I don't have that information on me right now.

Ameet Thakkar - Deutsche Bank Securities

Okay. Thank you very much.

Operator

Your next question is a follow-up from Ashar Khan from SAC Capital. Your line is open, sir.

Ashar Khan - SAC Capital

Kirk, I was trying to get a sense of cash flow for next year, if I am right based on the first nine months you have running kind of even or slightly negative but then if I am right, we will pick up on these earnings; we will have the deferred fuel recovery and if CapEx is staying flat, doesn't that put Allegheny in a positive cash flow situation in the tune of $100 million to $200 million?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

No, I mean we'll expect cash flow in '09 to be negative. We expect... we're seeing growth in pre-tax income but there are some items that are swinging in the other way from cash flow; the spending is about $900 million the capital and that's excluding the securitized portion of Fort Martin but that's up about $100 billion from last year.

Also we become a tax payer in 2009, we will paying about a $100 million in taxes and then if you remember we have the Maryland stabilization plan, where we took in about $60 million in 2008. We'll pay out a little bit more than $60 million in 2009. So those are some of impacts to free cash flow. But we are able to draw on our... we have that TrAIL facility that will be able to draw over $200 million in '09. With the negative cash flow we still expect to preserve our undrawn revolver capacity.

Ashar Khan - SAC Capital

Okay. So you basically flat next year, based on assumptions right now?

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Flat?

Ashar Khan - SAC Capital

I mean zero cash flow.

Kirk R. Oliver - Senior Vice President and Chief Financial Officer

Freecash flow we are negative but we have the revolver that we can draw on.

Ashar Khan - SAC Capital

Okay free cash flow you are still negative. Okay thank you.

Operator

And I have no further questions in queue, sir.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay, thank you all very much for joining us. We hope this time went well it seems so, and we'll... Kirk and I look forward to seeing you all next week at New York. Thanks for joining us.

Operator

This now concludes your third quarter Allegheny Energy earnings call. You may now disconnect. .

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Source: Allegheny Energy Inc. Q3 2008 Earnings Call Transcript
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