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Executives

Paul Evanson - Chairman, President & Chief Executive Officer

Kirk Oliver - Senior Vice President & Chief Financial Officer

Analysts

Ashar Khan - Incremental Capital

Lasan Johong - RBC Capital Markets

Reza Hatefi - Decade Capital

Michael Lapides - Goldman Sachs

Brian Russo - Ladenburg Thalmann

Scott Thomas - Newberg

Danielle Seitz - Dudack Research

Paul Patterson - Glenrock Associates

Andrew Levy – Incremental Capital

Zach Schreibe - Dusquense Capital

Ivana Ergovic - Jeffries

Greg Gordon - Morgan Stanley

Jesse Laudon - Zimmer Lucas

Gregg Orril - Barclays Capital

Allegheny Energy Inc. (AYE) Q2 ‘09 Earnings Call August 4, 2009 12:00 PM ET

Operator

Good afternoon, 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 August 11, 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 website 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 question to two each. So we have time to get to as many of you as possible.

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

Paul Evanson

Good afternoon, everyone, and thanks for joining us. Today we reported adjusted earnings of $0.41 per share for the second quarter, compared to $0.45 a year ago. This reduction in EPS was due solely to higher income taxes. On a pretax basis, adjusted earnings for the quarter were flat with last year.

The key factors that contributed to stable earnings were higher generation rates in Pennsylvania and Maryland, and increased recovery of purchased power costs in Virginia. Offsetting these factors were reduced outputs from our generation plant, and significantly lower market prices in PJM.

Availability at our supercritical coal plant was down 4% in the second quarter. This was due to higher planned outages, which included the first tie in of a scrubber unit. Total planned outages increased by seven weeks in the second quarter compared to the prior year.

Now the capacity factor at the supercriticals in the period, however, was down due to not only the higher planned outages, but also and even more so, weak demand, reflecting both the recession and very mild weather in June. Output at the sub-critical unit was down very sharply, 80% plus due both to the economy and composition from low price natural gas generators.

As a result, total generation production for the fleet was down 22%, compared to last year. So we certainly didn’t have the open megawatt hour sales in the quarter that we had expected. Round the clock prices at the PJM Western Hub, averaged just under $34 per megawatt hour in the second quarter, down nearly 60% compared to a year ago.

We ended the year with about 90% of our unregulated planned output contracted or hedged at higher prices, and this provided significant protection from the market price declines, but most of our contracted outputs was our Pennsylvania power transact, where price is fixed, but volume is not and volume is down, so we didn’t show as much in Pennsylvania also as we had expected.

In contrast, our regulated delivery business, Allegheny Power, reported higher net income. Deliveries earnings grew by $23 million due in large part to increased cost of recovery in our Virginia territory. Retail sales fell 7% in the quarter. Residential and commercial sales were relatively flat, but industrial usage fell by 18%, reflecting the weak economy.

Our net decline in sales volumes mirrored the decline in the PJM region, which was down 6%. Overall, these are very challenging economic times that are affecting both of our major businesses, and the recessionary impacts are being exacerbated by an exceptionally mild summer. Despite these headwinds, we’re managing through this period reasonably well, and the same focus on improving business fundamentals and achieving our priorities for the year.

Let me update you on a few of these. One of our top priorities is managing the transition to market based rates in Pennsylvania. We had our second auction in June to procure generation supply post 2010. For residential customers, the average retail generation price in the June auction was $71.64 per megawatt hour, including energy, capacity; gross receipts taxes, and line losses.

We’ve now procured over 50% of the power required to serve residential customers in the state for the year 2011. Based on the results of the first two auctions, residential customers would see a 10% increase in their average electric bills, a pretty reasonable number.

Locking in world prices for Allegheny Power makes sense as a way to protect customers and assure the transition to market. On the generation side of the business however, the decision to commit to power contracts at these prices involves a different set of considerations as Kurt, will address in shortly.

In the June auction, Allegheny Energy supply won contracts to supply about 700,000 megawatt hours of commercial load. Winning bids provide about a $16 per megawatt hour increase in energy margin for 2011, compared to 2010. This excludes the capacity margin, which will be down in total for 2011.

At the time the bid was submitted, energy prices at the PJM Western Hub was $57 per megawatt hour, and next-generation supply auction in Pennsylvania will be held in October and will be for 1.8 million megawatt hours.

As for our transmission project, the Trans-Allegheny Interstate Line or TrAIL is on schedule for in-service in 2011. We have more than 80% of the total capacity we need for the project under option or easement, and we’re now erecting steel on segments of the line in West Virginia, as seen in this photo.

I’m also happy to report that we have reached a settlement with the PSC staff, a consumer advocate, and other stakeholders on an outstanding issue involving cost of the Pennsylvania portion of the line. To meet the growth in the county adjoining Pittsburgh, we agreed to reconfigure some smaller existing lines, add equipment to some substations and strengthen our interconnection with Duquesne Light.

In addition, PJM has identified several new, smaller scale transmission projects that will be needed in Southwestern Pennsylvania in the 2012, 2013 timeframe. These proposals should preserve the integrity of the transmission system in the Southwestern Pennsylvania. Each new project, as well as the settlement will need to be approved by the Pennsylvania Public Utilities Commission.

Following commission approval, and look at our weighted spending estimate, we don’t anticipate a significant change in the total capital expenditures for the TrAIL project, although, the timing of the expenditures may change a little. On our Potomac-Appalachian Transmission Highline project or PATH, we filed a name for approval for alarm in all three states across the West Virginia and Maryland.

Public hearings began this week in Virginia and evidentiary hearings are also scheduled there for January. No procedural schedules have been established yet in the other states, but we expect that to occur in the near future. Decisions in all three states will take about a year.

On the environmental front, the first Hatfield scrubber went in to commercial operation in early June as scheduled. The remaining two Hatfield units, as well as the two Fort Martin units are on budget and on schedule for in-service by the end of the year. We were also recently able to take advantage of tax-exempt financing for the Hatfield project, issuing $235 million of tax exempt bonds.

We continue to work on a number of Regulatory Matters. In West Virginia, we filed in July for interim recovery of $82 million in fuel and purchased power cost, the amount of our actual under recovery there through June 30. Prior to September 1, we’ll file for a further reduction to reflect projected fuel and purchase power costs, for calendar year 2010.

In addition, we filed a request last month to securitize the remaining $100 million in costs for the Fort Martin scrubber. Finally, we expect to file a base rate case later this month. In Virginia, we expect to file later in the third quarter, for approval to sell our operations in the state for $340 million to Rappahannock Electric Cooperatives, and the Shenandoah Valley Electric Cooperative. We’re targeting a year end closing.

Maintaining a solid financial position remains one of our most important priorities. Those of you who will follow this company in the dark days of 2003, will remember that we made returning to investment grade a top priority. That decision has served us well. We’ve also been very successful over this time period in controlling costs, and we’ve emphasized cost control even more during the first six months of this year. The low cost focus is now very much part of the Allegheny culture.

Let me now comment on two major developments. First, climate change legislation. We’re still working with our delegations on Capitol Hill as the debate continues in Washington. The Waxman Marcus House bill was passed slight before July, 4, is more balanced than President Obama’s original proposal.

It contains allowance provisions for coal burning, merchant generators, and provides for transition through 2030. Now we think there’s ample room for improvement in the proposed legislation. The House version does provide for a reasonably smooth transition to a low carbon world for our company, our customers, and the economy as a whole. The Senate is expected to take up their version when they return in September, but I’d say it’s unlikely a final bill will be passed this year.

Second, the PJM capacity auction, in May, results of the 2012, 2013 auction period were announced. The market’s clearing price at our region decreased sharply through this period. As a result, we expect cash flow from this source to decline about $190 million in calendar year 2012. We believe that prices at these levels are not sustainable. They will neither intend new generation, nor maintain less efficient units. As demand increases, or transmission constraints are eliminated, the value of our capacity should increase.

The PJM Reliability Pricing Model has generally been have success, and we’re working through the stakeholder process with PJM to improve it further. Finally, two personal matters: We recently strengthened our leadership team with he addition of Rodney Dickens, as President of Allegheny Power.

Rodney comes to Allegheny after a 32-year career at Public Service Electric and Gas of New Jersey, where he held several executive positions on the delivery side of the business. He is now to the industry, especially his experience in quality improvement, mark grid, and transmission make him an excellent fit for our company. We hope all of you get a chance to meet him soon.

Finally, on a personal note, with the support and encouragement of our Board of Directors, I’ve agreed to extent my employment with Allegheny until June 20, ‘11. Allegheny is a great company, with a strong leadership team and employee base. I enjoy the job, and while we have our challenges.

I’m confident that our balanced business portfolio, solid financial condition, high performance, world class culture and our strong growth prospects position us to deliver meaningful shareholder value well in to the future. I’m excited at our company’s prospects.

Now, let me turn the call over to Kirk.

Kirk Oliver

Thank you, Paul and good afternoon everyone. For the second quarter of 2009, we reported GAAP net income of $73 million, compared to a $150 million a year ago. We earned $0.43 per share in the second quarter versus $0.91 in the same period last year. Adjusted earnings for the second quarter were $0.41 per share, as compared to $0.45 per share for the second quarter of last year.

Adjusted earnings, exclude net unrealized gains and losses, which are associated with economic hedges that do not qualify for hedge accounting. For the six months ended June 30, adjusted earnings were $1.08 per share on an adjusted basis as compared to $1.25 per share last year.

As Paul stated, despite the recession and very low energy prices, pre-tax earnings were flat. I would like to summarize some of the key factors that impacted the pre-tax earnings. Higher generation in Pennsylvania improved revenues by $33 million. Our Pennsylvania generation rates increased 20% on January 1 of this year.

This increase was partially offset by the exploration of a surcharge related to Pennsylvania stranded cost recovery. The surcharge which benefited earnings last year, expired in June 2008. The Virginia increase of $28 million reflects increased purchase power cost recovery as a result of our settlement last year.

In January 2009, residential customers in Maryland moved to market rates for generation. This benefited second quarter earnings by $17 million following the methodology used when we first quantified our 2009 earnings growth driver. Since then, market prices have come down and we have captured that difference in market prices and hedging activity below.

Our marketing and financial hedging activities along with capacity revenues largely protected us from a significant decline in market prices, which were down nearly 60% at the Western Hub, year-over-year. A combination of lower generation output, lower market prices and lower polar demand, significantly offset by our hedge position, reduced energy margin by $70 million.

Adverse market conditions also reduced ancillary services by $10 million, while capacity revenue increased margin by $13 million for the quarter. Higher coal prices at AE supply, decreased pre-tax income by $17 million, our fully delivered coal price increased by about $7 to $53 per ton. O&M expenses excluding amounts recover in formulaic were higher by $12 million, primarily due to increased spending on planned outages versus the same quarter last year.

This represents the bulk of our expected O&M increase in 2009. We continue to make progress on our transmission expansion project, which increased pre-tax earnings by $7 million. Other items include our current river gas pipeline hedges and benefits related to state tax settlements. In total pre-tax earnings adjustment for unrealized gains and losses were $117 million, the same as last year.

Our adjusted effective tax rate increased over last year by 6%. This is due primarily to a benefit that we recorded last year for an increase in estimated future benefits. These benefits result from carrying forward net operating losses under Pennsylvania tax rule. The rates in both years were also affected by recording the expected effect of income tax audit adjustment. This concludes my discussion of earnings for the quarter.

Moving now to cash flow, net cash flow from operations was $234 million in the second quarter of 2009. $26 million increase compared to the second quarter of ‘08, largely due to reductions in collateral requirements as a result of PJM moving to weakly settlements effective June 1.

Capital expenditures were $296 million, including $44 million of spending on our Fort Martin scrubber and $96 million funded through project financing of our transmission expansion project. Free cash flow, excluding capital expenditures for these items was $78 million for the quarter, making the same adjustments for the full year 2009 we expect to have negative free cash flow of $150 million to $200 million, excluding the effect of Virginia sales proceeds.

Our capital expenditures for 2009 are still estimated to be about $1.1 billion. Our forecast for 2010 has increased a little, to over $1.1 billion. Included in these projections are about $20 million in 2009 and $180 million next year for smart meters and software necessary to comply with Pennsylvania Act 129. We’ll be filing for approval for these expenditures later this month, and once approved the cost will be recovered through a surcharge.

We managed the commodity positions of AE Supply, by entering into contracts for the purchase of coal and sale of power. We establishing the target over our planning horizon, we seek to ensure adequate cash flow to support the operating and investment needs of the company. Our current targets are laid out on this page, and show the ranges we expect to achieve by the end of this year.

These ratios represent the percentage of AE Supply’s, forecasted total coal fired output that will be locked in at a fixed price. We have adequate liquidity to support the business and our hedging objective and we’ve recently taken steps to further strengthen our balance sheet and liquidity position.

In July, we raised $235 million from taxes and financing related to our Hatfield scrubber. In May we announced the sale of our Virginia distribution assets, for which we expect to receive in excess of $300 million sometime around the end of the year. In July, we filed for $100 million of incremental securitization financing for our Fort Martin scrubber project. Finally, we have also filed a self registration statement at corporate as a financing contingency. We have no plans to issue any securities, debt or equity from this filing.

Now let’s turn to the outlook. Let me update you on several items. Please remember that this list of drivers is not complete, but it should provide you with helpful incite on expectations for the year. Our estimates are based upon forward prices at June 30, 2009, which were $39 per megawatt hour at the Western Hub. We also reference the PJM Western Hub because it is the most liquid indicate for of power prices in our region.

We are increasing our transmission expansion driver by $10 million. Through June, our spending on TrAIL is $60 million greater than we originally planned. We expect to maintain an increased level of spend for the remainder of the year. The coal price driver is improved by $30 million and it’s now at $100 million negative.

We continue to purchases of high cost coal in to later years. We also have been able in some cases to eliminate purchases of high cost coal due to the reduced burn at the plant. The updated $100 million negative driver includes the benefit from these activities, which amount to about $40 million for the year. However, you should not assume that these benefits will carryover in to 2010. We’ll provide the 2010 driver on our next call.

The interest expense driver has increased to $40 million, due to the issuance of tax exempt bonds related to the Hatfield scrubbers in July, and our financing activity for the rest of the year. The negative driver for emissions and other fuel related costs has been reduced to $15 million.

Knox expense is expected to be minimal due to lower prices for allowances reduced plant output and operating efficiencies. We’re updating our market pricing, hedging activity and generation output driver from a negative $95 million, to negative $170 million, of decline over $70 million from our last call.

Generation output for the year is expected to be done over $1 million megawatt hours from what we were expecting at the time of the last call. The combination of lower generation output, lower market prices, and lower polar demand, partially offset by our hedge position is expected to reduce energy margins by about $65 million for the year.

Adverse market conditions are also impacting ancillary services, which are expected to have another $10 million negative impact for the year. Also, on our last call, we footnoted an estimated adverse impact on margin of $35 million for the balance of the year.

The open market price and volume exposure is now included in this driver, which will vary with market conditions for the remainder of the year. We expect the effective tax rate for the year to be about 40%, including the $9.5 million charge taken in the first quarter for the Pennsylvania NOL.

I would now like to cover several scrubber related items that will adversely impact 2010 results. These are items that only have partial year impact in 2009, but will have a full year impact in 2010. Obviously, this is not meant to be a list of drivers for next year.

In 2010, we’ll have a full year of scrubber operations, which will increase scrubber related expenses by $10 million versus 2009. These expenses are attributable primarily the lime expense and operation. As a scrubber show into operation, interest expense associated with construction financing will no longer be capitalized, which when combined with our financing plan will increase interest expense by $20 million in 2010.

We also have a full year of depreciation on the scrubbers, which will increase the depreciation driver by $30 million in 2010. You will recall on our last update, I provided some information on our financial hedges. These hedges are expected to contribute $164 million of pre-tax margin this year and will expire at the end of the year.

In addition, I wanted to provide some information on our marketing contract. These consist, primarily of our Maryland and Virginia full requirements contract. They are expected to contribute $55 million of margin this year and $36 million in 2010.

With that, I’ll now turn the call over to the operator, who will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ameet Thakkar- Deutsche Bank.

Ameet Thakkar- Deutsche Bank

Just a quick question, or a couple of questions around Slide 35. Kirk, do you have any updates for us on your progress and getting a lean structure in place to support some of the target ranges you’ve indicated here?

Kirk Oliver

Yes, we pretty much have that set to go with the bank that we’re working with and what we want to do is take, now go back and meet with the rating agencies again, because there’s been a little bit of concern, at least with one of the rating agencies about these facilities.

So, we’re going to go back and meet with the rating agencies, and take them through our complete liquidity plan, which will include this lean based facility and some incremental liquidity sources that we’re working on. Then we’ll put it all in to place.

Ameet Thakkar- Deutsche Bank

Then the target ranges here, what sort of volumes, I guess are these based on or already based on volumes at all?

Kirk Oliver

Yes, they are based on basically our total coal-fired volumes. So, they are based on about 30 million megawatt hours is a good way to kind of round it off.

Ameet Thakkar- Deutsche Bank

So, 30 terawatt hours for ‘10 and ‘11 as well?

Kirk Oliver

Yes.

Operator

Your next question comes from Greg Gordon - Morgan Stanley.

Greg Gordon - Morgan Stanley

Just to review on slide 14, the PJM West forward price, you have there as $57, right?

Paul Evanson

That was the price at the time in the auction.

Greg Gordon - Morgan Stanley

Right and you are saying that you are going to see a $16 pickup in your energy margins, ‘11 versus ‘10. I think you are using a $30 realized energy margin; is that correct, in ‘10?

Paul Evanson

What we did was take the Pennsylvania polar and deconstructed it back to get the equivalent of the PJM less than Hub that we said was $40. So, it happened to work in that period that delta around that 17 happened to be equivalent to the margin that we got, not that it always will be, but it happened to be equivalent then.

Greg Gordon - Morgan Stanley

Looking at slide 23, obviously the ADRTO price for 12 to 13 cleared at a very low number, and my understanding is that it’s, because PJM basically dispatched ILR at zero cost into the auction. It’s my understanding that they’re considering a different approach for dispatching ILR in the next auction. Is that, in fact, the case, and/or are there other changes that might bring about a more rational economic price?

Paul Evanson

I think they’re looking at a whole number of things relative to that. Obviously, the amounts of demand response increased significantly in this auction versus the prior one, and it just frankly is not a proven reliability. We all hope it is, but I think PJM needs to, and is seriously looking at making some rule modifications to ensure that it is.

So I doubt we’re going to see much more bid in it to, because as that increase is the economics of each decrement kind of deteriorate I’ve thought. So I know they have looking at a number of things. I have talked to them myself and so are a number of our folks. So we’ll see what happens on then next one.

Greg Gordon - Morgan Stanley

You said it before cash proceeds from Virginia that on an operating basis, you’re looking at being $150 million to $200 million of cash flow negative? Just making sure I got that right?

Kirk Oliver

Yes, that’s correct.

Greg Gordon - Morgan Stanley

What are the expected proceeds again?

Kirk Oliver

$340 million is the gross proceeds from it, and there’s no affiliated with it, or associated with it.

Operator

Your next question comes from of Ashar Khan - Incremental Capital.

Ashar Khan - Incremental Capital

I just wanted to clarify, a little I just wondered on this slide what you’re trying to convey the message. I just want to make sure I have it. This is the slide on the, slide 39, contribution to energy margins, financial hedges, and marketing contracts.

Kirk Oliver

Yes.

Ashar Khan - Incremental Capital

Kirt, it’s the way I look at it. Is it fair to assume that in 2010, you right now have no financial hedges? First of all is that a fair thing that there are no financial hedges in 2010?

Kirk Oliver

That’s correct.

Ashar Khan - Incremental Capital

Secondly, if I want to look at it is that the market is con tango, so if I was to try to do a more market-to-market comparison, would I be saying that, really, your margin would be going down by 183, but I should add something, because the curve is Contango? Is that right or wrong?

Kirk Oliver

That is correct. That is correct and of course, you can look at how much of our volume is hedged right now for 2010, and get kind of an open megawatt hour expectation, and use that to calculate the uplift from the Contango, curve.

Ashar Khan - Incremental Capital

Then I was just looking from the material that you provided in terms of the slide, which is the factors for this year, and what you’ve achieved for the first half. It seems like based on what you’ve done any first half, and what you’re indicating the factors are, that it is implying that earnings are going to be kind of flattish in the second half of the year, versus what you performed last year. That’s what I am getting from the numbers. Is that a fair assumption, unless, I’m missing something?

Kirk Oliver

I haven’t actually done the calculation on earnings half over half, but, I think if you are doing the math off of the drivers and getting to a number and you’re consist in your applications from historical to forward-looking, then you are probably correct.

Ashar Khan - Incremental Capital

Then if I can end up, Kirk, I know you’re not giving 2010 and everything, but you’re giving a lot of drivers for 2010, I guess. You’ve given us Pennsylvania, you’ve given us the scrubber, and I’ve given this energy margin, the Contango, and everything, but I’m just trying to get a sense I guess are you trying to give us a message that earnings are going to be much more like flattish or is that the message you’re trying to convey? It’s like a lot of pieces you’ve given. I’m just trying to get a sense.

Kirk Oliver

We don’t give earnings guidance and we’re trying to give any earnings guidance for 2010. I think what we’re trying to do is take certain items that in 2009, if you look at it, and just assume that it is going to be similar in ‘10, could be confusing. So, that’s why we have broken out this effects that have more to with scrubbers going into operation and you don’t have the full year impact of that in 2009.

So that’s really what we’re trying to do there and then, I mentioned on the call that we have been able to defer some coal from ‘09 out in to the out years, so we’re picking up some benefit on the coal side from those deferrals that you shouldn’t assume we’ll be able to do again in 2010.

Operator

Your next question comes from Lasan Johong - RBC Capital Markets

Lasan Johong - RBC Capital Markets

You had mentioned briefly a that there seems to be some impact from coal to gas switching. Can you kind of give us a little more color of how much you see in terms of megawatt hours or in terms of amount of generation is being transferred over?

Paul Evanson

We have seen it in our own operations. I think we’re seeing it more generally in the PJM region. In our operation it is primarily affected in fact almost exclusively affected our subcritical plants with us some displacement of gas with always we really have not seen it at all for the super critical plants and I think what we’re seeing is pretty well consistent with the data that we’ve seen from PJM generally.

Lasan Johong - RBC Capital Markets

In last quarter is kind of I don’t know drivers for ‘09, Kirk there was a $35 million impact to market price hedging activity in generation output and that’s now $75 million. Is that including the other $35 million that you have footnoted on the bottom for the first quarter?

Kirk Oliver

Yes, what we did there was we moved the footnote up because it’s such an oversimplification to try to take open megawatt hours and run a change in price because we run a new dispatch every time and depending on what is happening with load and prices and demand, the open megawatt hour swings around, so we decided the better way to show it would be just to take that all, lump it together, and give everybody, the total number.

Lasan Johong - RBC Capital Markets

So, that means as the curve changes up and down, $75 million is going to move up and down as well.

Kirk Oliver

Yes, that’s why we put the little plus or minus next to it on the slide.

Lasan Johong - RBC Capital Markets

Then it just fairly say that it was very hard to see you on the conference call by the today.

Paul Evanson

Yes, sorry about that. We had some communication issues there.

Lasan Johong - RBC Capital Markets

If I heard you correctly, Kirk, on the $100 million coal price change swing, that had mostly to do with the fact that Allegheny is not burning as much coal; is that right?

Kirk Oliver

No, that’s just totally coal price. We isolate the price component and take the volume component out of that number. So, if you think about, coming into the year when we gave original guidance, I think that coal driver was around 140, and we have been able to defer or cancel coal deliveries and that provided us a benefit this year of about $40 million on the coal driver, but that will come back in future years, or some of it will.

Lasan Johong - RBC Capital Markets

I mean the reason why you would defer that would be because you are burning less generation, no?

Kirk Oliver

Oh, yes, that’s right. That’s true.

Lasan Johong - RBC Capital Markets

I have one last quick, I believe. In the past, Paul, you had provided us with some very nice little charts, showing how your costs have decreased overtime, and how you are getting to like $685 million and you have exceeded those targets, etc., and you talked about cost control here, but you are not giving us a good sense of kind of what your target number is these days?

Paul Evanson

No, as you say, we brought it down from $1.1 billion down to $686 million in ’06 and we have been pretty constant in that level through $78 and this year our target is the same thing, excluding items that have new business, like TrAIL that’s formulaically recovered, and I think we’re pretty well on target to hit that estimate this year and every year it is a battle, but every year we really want to focus on holding that cost as flat as we can.

So we have in done our budgets yet for ‘10, but as I said in the call, I think that low cost focus is really embedded in the company. I’m hopeful we can stay at that level as long as we can.

Lasan Johong - RBC Capital Markets

One quick other question on the first quarter presentation. You had CapEx spending in 2010 of $880 million, and now its $1.1 billion. The delta I’m assuming is TrAIL.

Kirk Oliver

It’s some TrAIL, and Act 129 that’s coming in the year. We have accelerated TrAIL expenditure so far this year by about 60 million.

Paul Evanson

129 is that Pennsylvania legislation that got passed a year ago.

Kirk Oliver

That’s a small piece of it.

Paul Evanson

Yes, and it will be a greater piece overtime. Smart metering, energy efficiency things of that kind.

Operator

Your next question comes from Reza Hatefi - Decade Capital.

Reza Hatefi - Decade Capital

There’s a lot of numbers earlier, so you expect 2009, ‘10, and ‘11, unregulated generation to be around 30 terawatt hours, did I hear that correctly?

Kirk Oliver

It depends on the dispatch, and we run a new dispatch before every call, and of course the dispatch output is a function of what prices are and we just strictly use, forward pricing. So, it could vary, but it will vary in a range of around 30 million to 35 million megawatt hours or 30 to 35 terawatt hours.

Reza Hatefi - Decade Capital

This year though, is supposed to be 30?

Kirk Oliver

This year, I think we started out higher, but now we’re expecting between 30 and 32.

Reza Hatefi - Decade Capital

You have the slide on the percentage hedged slide 35. Current status in 2010 is 80%. Now, 20 terawatt hours of roughly 30 terawatt hours of total generation is 66%. The other 14% or so that’s hedged, what is that related to, remind us, and when were these hedges set?

Kirk Oliver

Well, two big chunks of that are the Maryland and Virginia contracts that we have got. Then there’s some other contracts. We have some, other small marketing contracts. That’s really pretty much where it is all is.

Reza Hatefi - Decade Capital

Then you have the other slide with the scrubber drivers slide 38, is that for both the unregulated and the regulated scrubbers that are coming online?

Kirk Oliver

That’s really the unregulated, because the regulated scrubbers will get cost recovery and rates.

Reza Hatefi - Decade Capital

When is that West Virginia rate case going to be effective, ballpark timeframe?

Kirk Oliver

We’re filing a case for base rates that will probably be sometime mid 2010.

Reza Hatefi - Decade Capital

Effective date and so, it will be that rate case which will lead to the recovery of the regulated scrubber costs?

Kirk Oliver

Yes, except that most of the scrubber costs are picked up already in the securitization. We securitize the bulk of the scrubber on the regulated side, the Fort Martin scrubber. So, all by $100 million of that’s all been securitized and we are getting recovery of it currently.

Reza Hatefi - Decade Capital

I just meant the O&M and the depreciation parts?

Kirk Oliver

Yes, that will be picked up in the rates.

Reza Hatefi - Decade Capital

In the rate case that’s coming.

Kirk Oliver

That's correct.

Reza Hatefi - Decade Capital

On the securitized side?

Kirk Oliver

Just the operating costs.

Paul Evanson

Right, mainly depreciation and that’s all factored in to the securitization, I believe. When we do the last $100 million, we’ll pick that piece up and we have already filed for that.

Reza Hatefi - Decade Capital

The coal markets, it’s kind of been moving around a lot. What are you seeing these days in terms of contracted coal prices, for 2010, ‘11, ‘12, type timeframe? I know you are very hedged, and you are rather hedged well, but just kind of wondering about the open position.

Paul Evanson

Well, we’re 70% hedged for next year, hedged when we say, we have contracts and the price is fixed. There’s about 2 million tons that we have contracted for where there’s a price negotiation or arbitration perhaps coming on that and that would get us up to 90% next year. We’re really right in the middle of that, so, we’ll see soon enough.

Reza Hatefi - Decade Capital

Then just lastly, Virginia the distribution utility that you are selling. What is the net income for that utility here in 2009?

Paul Evanson

You mean for the two…

Reza Hatefi - Decade Capital

Well, for the part that you are selling…

Paul Evanson

We generate about $8 million to $10 million of net income in a, quote, normal year, for our Virginia operations. We haven’t had a normal year for a few years unfortunately, because we lost $100 million a year ago in that business. So, that’s the order of magnitude will be loosing $9 million to $10 million in recurring net income.

Reza Hatefi - Decade Capital

So, that $100 million came back though, this year, correct, because you are not recovering the fuel costs.

Kirk Oliver

Yes well recovering purchase power costs, and it’s rolling in over a two or three year period.

Reza Hatefi - Decade Capital

So in 2009, that Virginia utility is now, kind of earning it’s in the black now or?

Kirk Oliver

I think it’s yes, it’s in the black, but it’s not quite up to that full scale $9 million to $10 million net.

Operator

Your next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides – Goldman Sachs

Just quick question on generate output this year from super critical and subcritial units. Can you walk through that again, I thought I misheard about the number of expected output for 2009?

Kirk Oliver

For 2009, we’re expecting somewhere around $30 million to $32 million megawatt hours. That’s total.

Operator

Your next question comes from Brian Russo - Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Just real quickly, could you talk a little bit about what you are seeing with your basis differential? We’ve seen it now in other sub regions due to lower demand and gas prices. I was just wondering if you could comment on how that’s impacting your pricing?

Kirk Oliver

We benefit from the price received at our plants, when the base is narrows and with prices coming down and conjunction coming down, they are narrowed quite a bit.

Brian Russo - Ladenburg Thalmann

Can you quantify that?

Kirk Oliver

I’d rather not quantify it.

Brian Russo - Ladenburg Thalmann

Okay and just on your emission related costs. I mean, I think you are pretty much fully hedged for 2009. I’m just wondering, what you are seeing kind of in the forward markets in 2010 versus 2009?

Kirk Oliver

I think SO2 has been plenty flat in Knox. I think everything has been fairly flat. If you give me a second we can…

Paul Evanson

I mean the SO2 is so low. It’s gone from very low to even lower. $70 million is maybe down to $40 million in SO2.

Kirk Oliver

Annual Knox is pretty low now down. Annual Knox is down to the $600 allowance level.

Brian Russo - Ladenburg Thalmann

So would you expect your cost to comply to be less in 2010 than it is in 2009?

Kirk Oliver

In SO2, 2010 we actually go long a little bit.

Brian Russo - Ladenburg Thalmann

Due to the scrubbers?

Paul Evanson

Yes. We’d be happy when up a little bit. That’s not going to be a benefit to us. The annual Knox if it stays at that 500 level would have a relatively small impact on us.

Operator

Your next question comes from Scott Thomas - Newberg.

Scott Thomas - Newberg

I apologize if you covered this in this script. I couldn’t hear some of the comment. Can you provide some color around the universal shelf you filed yesterday?

Paul Evanson

Yes, we filed a universal shelf at corps, and that’s really we filed it just to have it there for contingency purposes. What I said on the call is that, we don’t have any plans to issue any securities off of that shelf, debt or equity.

Scott Thomas - Newberg

We should think of that as like a 2009 kind of a thought, and then 2010, as we’ll see thought?

Paul Evanson

We have obviously long range plans and we don’t have any anticipated financing off of that shelf in our long range plans. That’s not to say that that couldn’t change at some point, of course it could change, but right now if you look at our long range plan, there’s no issuance of securities off of that shelf. It’s totally there for contingency purposes.

Scott Thomas - Newberg

Maybe just elaborate, what kind of risks would you be contemplating that you need to dip into that contingency?

Paul Evanson

Risks that, we can’t see at this point.

Kirk Oliver

Kind of a recurrence of where the old economy was September, October, November of last year, you might say this is a discerned response to that.

Scott Thomas - Newberg

Just another quick one, can you remind us what your assumption is for the in-service date on the TrAIL line is?

Paul Evanson

June 2011 and we’re on target.

Scott Thomas - Newberg

You are on target for that now?

Paul Evanson

Yes.

Operator

Your next question comes from Danielle Seitz - Dudack Research.

Danielle Seitz - Dudack Research

I just wanted to ask you, and all of my questions have been answered. One thing, the cap structures, and where do you want to remain? I’m assuming that this shelf is so that it will allow you to stay in the cap structure you want. I was wondering, if you have any specific goals for that?

Kirk Oliver

We don’t have any plans for using the shelf to target any kind of cap structure. We have at current forward prices and, based on our long range plan, we’re pretty comfortable with where our capital structure is headed?

Danielle Seitz - Dudack Research

You don’t want to specify the numbers just in case?

Kirk Oliver

Yes, I’d rather not go in to the numbers.

Operator

Your next question comes from Paul Patterson - Glenrock Associates.

Paul Patterson - Glenrock Associates

On the coal cost cutting, the deferral, I guess of higher priced coal. How much of that will be deferred, I guess, is it the full $40 million or has some of it been cancelled? What years would that show up? Would that show up in 2010, or how should we think about that?

Paul Evanson

Last time we showed a hedge position, we showed like an average for what was contracted, $58 a ton in ‘09, and about the same thing in ‘10. Based on what we’ve done to-date, you’d probably see ‘09 go down by maybe $3 a ton, and you might see ‘10 go up by about $1 a ton on average, for the whole amount of the tonnage.

Paul Patterson - Glenrock Associates

So in other words, I guess it’s only going to go. The average is only going to go up by about $1. Why is the difference…?

Paul Evanson

$1 per ton on the contracted piece; 30% uncontracted in ‘10.

Paul Patterson - Glenrock Associates

Would that go up? I mean, I guess I’m saying is, that $40 million of above of higher cost coal, how do we think about that, I mean, in terms of doing the math, it would seem to me that would indicate sort of an asymmetrical, but there will be that you’re getting a better impact in 2009, 2010.

Paul Evanson

That’s right, because some of the tonnage as we’ve just eliminated totally and the tonnage that we have eliminated to highest priced tons some of it gets deferred also. Does they are not deferred all in just ‘11; they are deferred over a number of years.

Paul Patterson - Glenrock Associates

Okay, but the impact in 2010 would be $1 per ton times the amount of hedged tons; is that correct?

Paul Evanson

Yes.

Paul Patterson - Glenrock Associates

Then on the tax benefit that you guys got from tax element at $6.4 million. Is there more activity like that that’s potentially happening in 2009-2010?

Paul Evanson

Which $6.4 million is your referring to, Paul?

Paul Patterson - Glenrock Associates

I believe in the second quarter you guys mentioned that there was a benefit of $6.4 million from a tax settlement?

Paul Evanson

In ‘08, that was the Pennsylvania NOL. No, that was kind of a one-time estimate, and some of which I actually I think we reversed in the first quarter of ‘09, if I’m…

Kirk Oliver

We had some other tax benefits in ‘08, and we had also this Pennsylvania NOL valuation which helped us in ‘08, and hurt us in the first quarter of ‘09.

Paul Patterson - Glenrock Associates

Okay. I guess when I’m looking at second quarter consolidated results, I see taxes other than income taxes decrease by $6.4 million primarily due to a favorable state tax settlement?

Paul Evanson

Yes, that’s not a repeating that’s more of a one-time.

Paul Patterson - Glenrock Associates

Okay, so we shouldn’t expect more activity like that, is that correct?

Kirk Oliver

No, we’re constantly looking for ways to improve things, but no I don’t think you can count on that to be please..

Paul Patterson - Glenrock Associates

From the cash flow excluding our working capital, I mean you give the $234 million and the benefits from with this collateral. How do we think about, FFO for the quarter as opposed to without working capital? How do we think of cash flow from operations without working capital? Do you have that? I can follow-up with you guys afterwards. I was just wondering if you had that number.

Paul Evanson

Yes, we can follow up on that. I don’t have the number handy.

Operator

Your next question comes from Andrew Levy - Incremental Capital.

Andrew Levy – Incremental Capital

Just to clarify something, though, just based on what everybody has been saying, and I guess looking at consensus and sum of numbers that you outlined. Paul, would you say that it would be a challenge to grow earnings significantly in 2010 after 2003 base; or can you comment on that?

Paul Evanson

Off of this year’s base, did you say, Andy?

Andrew Levy – Incremental Capital

That’s correct.

Paul Evanson

Well from 9%, it’s a pretty challenging environment out there for sure. The big question is, what happens in the economy? I think will be a challenge if that economic conditions continue to weaken. Then we have some headwinds relative to the financial hedge that we had on there that was very positive in ‘09.

So, it’s going to be a challenging year, there’s no question about it. We have some positives coming in and we’ll see what happens to prices and we’ll see what happens to demand over that period.

Operator

Your next question comes from Ryan Mooney – Dusquense Capital.

Zach Schreibe - Dusquense Capital

It’s Zach Schreibe from Dusquense. Just a quick question on the coal benefit, reduced negative the $100 million, in ’10 versus ’09 to the $140 million negative in ‘10 versus ’09.

Quick question, how much of that, can you just help us is actually just being deferred in to the future? How much of that is just going away? I know some of it’s going to be deferred, some of it’s going to go away, but what’s the balance, the breakdown?

Kirk Oliver

Well, generally $30 million to $40 million is the elimination, and $10 million is the rollover in to the following year, order of magnitude.

Zach Schreibe - Dusquense Capital

Why are coal folks, letting you guys just eliminate contractual obligations?

Paul Evanson

It depends on the contract, and in some of the contracts their flexibility as to volumes and clearly our output is down from expected levels. So, our coal needs a level are down similarly. It varies with contracts, depending on who you are dealing with.

The bigger guys it is sometimes more difficult, the smaller guys, sometimes it’s easier. Obviously we are focused on the ones with the highest cost coal to us. So, that’s what we have been working on and plus we have done a lot of optimization in deliverers and things of that kind that have helped us.

Zach Schreibe - Dusquense Capital

Would you say that that split is representative sort of how you think this whole shakeout in the coal industry is going to play out? Is it much more just unique to your experience and your contracts?

Paul Evanson

I think from what I gather and I’m hardly an expert on what all of the other companies are doing with their contracts, but I think we have probably a little more flexibility than a number of other companies that I know. Some of it is just going out there and asking for it, and pushing for it. That’s what we’re paid to do, right.

Zach Schreibe - Dusquense Capital

Yes, on the deferred tons, do you have to pay any penalty to defer those tons?

Paul Evanson

No.

Zach Schreibe - Dusquense Capital

Some sort of MPV make whole and better than the …

Paul Evanson

There isn’t on those items that we have deferred, no.

Zach Schreibe - Dusquense Capital

If you wanted to defer tons in which, you have contracts in which there isn’t volume flexibility, typically how much do you pay for every year you sort of roll it out?

Paul Evanson

I really wouldn’t be able to comment on that, Zach. I mean our inventory levels now are pretty a little high. I mean they are 40 days from the suppers, but they vary from a lower 20 at one of our sites to a higher 50. So, we would like to get it down a little lower, but I think we have done a good job where we’re at.

Zach Schreibe - Dusquense Capital

Where would you like to be like 25 days?

Paul Evanson

That was our goal going into last year and this year. That’s where we would like to be.

So, there are some money tied up in that inventory for sure.

Zach Schreibe - Dusquense Capital

When you talk to the railroads, they say that they are expecting thermal coal shipments in the second half of the year to be higher than they were in the first half of the year because utilities are going to have to honor contractual obligations that they deferred in the first half. Do you guys have a similar situation?

Because you are much more mind math. You are not going to have the same kind of increase in shipments received of coal in the second half versus the first half.

Paul Evanson

I think that’s right.

Zach Schreibe - Dusquense Capital

How long do you think it will take to get your inventories down to 25 days, given what you see?

Paul Evanson

Well, I think next year is probably the earliest point we can do that. We are going to start regulating and trying to optimize shipments with production, etc., there is still as Kirk we’re saying still some uncertainty as to what the production levels will be in ‘10, let alone ‘11, so we’re trying to manage that as closely and I think at 40 days, we’re probably maybe better than most and would like to bring it down from there. I just wouldn’t want a comment on how fast we can get down the 20 days to 25 days.

Operator

Your next question comes from Ivana Ergovic - Jeffries

Ivana Ergovic - Jeffries

With actually what estimate to you have for open position for the rest of 2009 in your drivers?

Kirk Oliver

It’s about 2 million megawatt hours.

Ivana Ergovic - Jeffries

Understand if you are deferring some of the coal deliveries for next year. Should we then assume that you are already kind of more hedged for next year than what you said before? I think you said you were 70% hedged because you are going to get more coal delivered.

Paul Evanson

There would be a little benefit from that side, yes.

Ivana Ergovic - Jeffries

What would be the number?

Paul Evanson

We were really going to do that at the next time when we get these three the 2 million tons that we are pricing now in, and revise it at one point in time, but it would have some impact.

Ivana Ergovic - Jeffries

And another thing I have a problem getting from 30 million to 32 million megawatt hours this year. If I look at what you sold so far or generated so far it’s like 18.5 million megawatt hours, and if you multiply that by 2, which is kind because last year you sold equal amount in first holding here.

I mean the second half it was like around 37 million megawatt hours, and then I guess some of with this highlight probably around 10 at least, so I can come up with less than 30 million megawatt hours for Allegheny Supply, so I’m not sure if I’m missing something.

Kirk Oliver

You may be talking about supply versus the regulated business?

Ivana Ergovic - Jeffries

I think you said the total is 30 to 32 for supply?

Kirk Oliver

Yes.

Ivana Ergovic - Jeffries

If I’m looking at right now, you sold $18 million, I guess, in total and if I multiply that by 2, it is around $36 million, $37 million, and I think more on the last year 12 million…

Kirk Oliver

That $18 million you are looking at is for the total G&M, so that’s supply demand and power together.

Ivana Ergovic - Jeffries

Yes, that’s what I’m saying, so if you assume it is doubled for the year, so like around 36 million, 37 million for the year? And then, like much of it is Monongahela I’m assuming Monongahela is at least 10 million megawatt hours, which would leave Allegheny Supply with less than 30 million.

Kirk Oliver

The first half of ‘09 for supply is about 13 million. Does that help you?

Ivana Ergovic - Jeffries

So you are assuming another 17 for the next half of the year for supply? Why would you assume increase in…?

Paul Evanson

Because the forward curve for power prices is higher so demand will be higher in the second half when you run a dispatch. The plants will run more at higher prices.

Operator

Your next question comes from Greg Gordon - Morgan Stanley.

Greg Gordon - Morgan Stanley

What was the cap spending in 2009 and 2010 associated with the Pennsylvania Act 129. Could you repeat that?

Kirk Oliver

Yes, 2009, I think is around $20 million and 2010 is $185 million.

Greg Gordon - Morgan Stanley

Do you have a sense of how much spending, order of magnitude you might be looking at in ‘11? Is it in the order of magnitude of 2010?

Kirk Oliver

You are talking about for Act 129? Yes, it comes down a little bit in ‘11.

Greg Gordon - Morgan Stanley

But not back down to the ‘09 level. Can you refresh our memories on what the return for capital protocol earning is on that money?

Kirk Oliver

What the allowed return is I think they allow return right now in Pennsylvania it’s 11.5 but don’t hold me I think that’s right and the way this works is we file in advance what our plan is and then recollect a surcharge on a regular basis, which gives us return off, and return on.

Greg Gordon - Morgan Stanley

Should we assume you’re going to earn whatever the authorized return is on the traditional equity layer in that investment?

Paul Evanson

Yes, the allowed return on rate base for those investments.

Greg Gordon - Morgan Stanley

Are they on some sort of accelerated amortization schedule or they under a normal amortization, normal depreciation?

Paul Evanson

Forget now what the amortization is Greg, but it’s an amortization schedule that you would expect for these kinds of smart meters.

Greg Gordon - Morgan Stanley

So it’s not like a five year life?

Paul Evanson

There is some different computer components, there’s the meters, and then there is some CIS investment. So its got different depreciable life.

Greg Gordon - Morgan Stanley

But, it’s not an extremely truncated life? I’m trying to understand whether…?

Paul Evanson

No, it’s not. In fact it’s not as short as I thought it would be for some of meters.

Greg Gordon - Morgan Stanley

So we would treat it like basically similar type of investment. So your transmission investments in TrAIL, as you spending it you are capitalize it and earn on it at a traditional rate?

Paul Evanson

Yes, pretty much.

Operator

Your next question comes from Jesse Laudon - Zimmer Lucas.

Jesse Laudon - Zimmer Lucas

I just wanted to get an update on your outlook for retail sales. You’ve had pretty good results in residential and commercial. Do you expect that to sort of hold up for the balance of the year and into next year? What about industrial, do you think it sort of has bottomed at this point? How should we expect that in the second half of the year?

Paul Evanson

Our residential has been for the six months is actually up a little bit. We have had a little growth in customers, and we’ve actually had a little growth in usage despite the weather. So that’s been positive for six months. Commercial is up a little bit. The big falloff has been in industrial. That 18% in the quarter, which was the biggest falloff period-to-period, but we’re off 15% year-to-date.

It’s coming primarily from a few segments, chemicals, stone, concrete products, are all off like 24% year-to-date, primary metal steel down like 15%. So the big falloff, we would have been doing even better, but for the mild weather in June. So I think we’re assuming, you start to say when industrial is necessarily going to becoming back, but I think we’re kind of mirroring the whole PJM region, which is down 6% year-to-date, whereas we’re down 6% in the quarter.

They are down year-to-date 3.5%. We’re down about 4% or so, and most of the PJM, the big decrease came in June with the weather. So we put all of that together, I think as we thought going into this are not going to have a major decline in kilowatt hour sales for the company. We haven’t had it in past recessions. So far we’re doing reasonably well in this despite the significant falloff in industrial usage.

Jesse Laudon - Zimmer Lucas

Can you remind me, do you have an easy comparison in the fourth quarter, or you didn’t really see the impact until the first quarter?

Paul Evanson

We started seeing it in the industrial in the fourth quarter. Actually, out there ‘08 there was slight declines, but fourth quarter then we really saw a big falloff in the first quarter, and a significant falloff in the second quarter. So it’s been coming down sharply, but third and fourth quarter then, I think it won’t be compared to very strong periods, but I’m sure it’s still going to be off.

Operator

Your next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

One quick follow-up, if I go back to the financial statements that you had on your website for Allegheny Energy Supply, you gave a table that had fuel purchase and transportation commitments for 2009 through 2013. The dollar amounts look like, almost like a bell curve, 2009 and 2013 dollar amounts are pretty similar to each other, and then the peak is 2011.

I think at about $770 million of fuel purchase and transportation commitments. Just curious I want to make sure I follow that correctly. Given the fact that you’re more hedged for coal in the short term than you’re in the long term that implies kind of a gradually rising price per ton per for either coal or transport. I want to make sure I’m interpreting correctly and how that fits into the $50 to $60 a ton disclosure you’ve made in some of your EEI and analyst day presentations historically?

Kirk Oliver

We don’t have, we’re looking to see if we have the table you’re referencing that’s on the website. I mean, we have in front of us, we would show typically a bar chart that showed going all the way out to 2017, the percentage coal that we were hedged, and then what the prices were. Are you familiar with that chart and can we answer your question by using that chart, or…

Paul Evanson

Yes, I guess I mean what I’m trying to do really is sync of that chart that you’ve historically disclosed with the comments you made about pushing out in response to Zach’s question, about pushing out some of the coal hedges and eliminating some of the others with what you closed in the Allegheny Energy Supply, financials you had on your website.

Kirk Oliver

Well, I did mention that in ‘10 we had a numbers 58 for what was contracted that will probably go up to 59 and as best I recall, the numbers going forward over the next several years, they will depart significantly from that level what’s contracted for. It’s really a longer-term contracts, I think it’s all within that pretty tight range of the upper 50s there, 60s.

Operator

Your next question comes from Gregg Orril - Barclays Capital.

Gregg Orril - Barclays Capital

I was wondering if you could just remind us of how much CapEx you’re spending on TrAIL in ‘10 and ‘11.

Paul Evanson

We’re digging for that, Gregg. For TrAIL in ‘10 and ‘11 we got it out to ‘10 year. We’re $285 million in ‘10, and $275 million in ‘09 and I’m waiting to see if I got an ‘11 number. Looks like about $100 million in ‘11.

Kirk Oliver

Some of the timing on that spending may change a bit, and we’d really have to look at that when we going forward, because, we’re finalizing the last piece at 36 miles within Pennsylvania. That’s $195 million, and we’ve reached an agreement on one piece of it already with Washington County. We’ have some other PJM projects that were already been approved and we’re looking at some other revised spending on the balance of the project.

So we’re still going to be within that $820 million, but the CapEx by year may change a little bit from what we even already have disclosed here.

Gregg Orril - Barclays Capital

How much would the settlement cover?

Kirk Oliver

Thus the settlement that we’ve reached already.

Gregg Orril - Barclays Capital

Great.

Kirk Oliver

Well, that is one part of it. It’s primarily the county right around Pittsburgh. Washington County. That’s a smaller project. That’s $12 million in total, but then there are other PJM projects in the county south of that, Green and Fayette County, and the south of to ensure that the power moves adequately and the estimate on that is $85 million. Both of those projects still need to be approved by the Public Utilities Commission.

So we got to go back on both of those. So there’ will be some delays and then as I say on the balance of the project, they’re really going through West Virginia and Virginia, the construction costs is little higher than what we estimated.

So when you add that in, you do come back, pretty much to the same $800 million, $820 million, but the timing of it may change a little bit, spending approval of these projects in Pennsylvania.

Operator

You have no further questions at that time.

Paul Evanson

Okay. Thanks very much for joining us. We’re sorry about the communications problem earlier. We’ll work on that among other things. Thanks.

Operator

This concludes today’s conference. You may now disconnect

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Source: Allegheny Energy Inc. Q2 2009 Earnings Call Transcript
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