As the utility industry passes from a highly regulated environment to a highly competitive marketplace, investors have greater opportunities to reap the benefits that this new freedom brings.

In 1999, Allegheny continued to position itself to maximize the financial rewards of the new competitive environment with the creation of Allegheny Energy Supply Company in November. With more than 4,100 MW of low-cost generating capacity, this new business is poised to provide significant earnings growth for the Company.

As our industry’s new playing field develops, nothing is more important to Allegheny Energy than remaining an attractive energy sector investment and continuing to provide value to our shareholders. We are determined to continue to offer shareholders a solid return on their investment while seeking new ways to grow that investment in the years ahead. To meet this objective and to be certain that we adapt our growth strategies to meet market realities, our leadership team evaluates our business direction on an ongoing basis.

Last year, one of our top financial goals was to provide our shareholders with a return that exceeds the electric utility industry average total shareholder return (the return achieved from a combination of stock price changes plus dividends). This goal remains a top priority.

Another goal of the Company is to grow earnings in excess of the average electric utility. Again, Allegheny Energy’s operating earnings per share (before extraordinary and other charges) were $2.64 ($307.2 million) in 1999, 13 percent higher than comparable 1998 operating results. And the Wall Street consensus earnings forecast for 2000 for Allegheny Energy predicts continued growth. We agree.

During 1999, the Company’s nonutility earnings grew by $69.2 million, while utility earnings declined by $46.8 million primarily as a result of the deregulation of two-thirds of West Penn’s electric generation (3,778 MW) and improved results of operations in deregulated energy markets. The Company is aggressively expanding sales in new deregulated markets as more states implement customer choice.

Industry analysts continue to recognize our earnings growth potential. For example, Tom Hamlin, a research analyst with First Union Securities, reports that, “Allegheny’s strategic direction focuses on building upon the two things that it does best: the generation and supply of energy. The Company’s low-cost, coal-fired base generation will give it an initial advantage in the deregulating markets in which it operates…”

Allegheny Energy has an enviable low cost structure, with efficient and low-cost generating assets located in key geographic areas, employees who have the skills and attitude to succeed in a changing environment, efficient and nationally recognized quality operations, experience in deregulated markets, and the business savvy to succeed in our new environment.

Our plan to increase the return on our shareholders’ investments includes the following:

• Growing our already-impressive, low-cost generating fleet regionally then nationally, expanding our nationally recognized energy delivery business in areas or states that are contiguous with or close to our franchised territory, and seizing non-regulated opportunities related to our core business.
   
• Implementing a revised dividend policy, which involves retaining more of our incremental increase in earnings for reinvestment. This will strengthen Allegheny Energy’s financial position and broaden our ability to make investments in deregulated markets. These investments will increase future earnings and enhance shareholder value, as earnings reinvestment gathers momentum.
   
• Managing our financial performance and structure to support strong “A” bond ratings in our utility businesses, which we have consistently achieved.
   
• Improving asset utilization in the utility sector to reduce capital requirements, while continuing to seek and make investments related to our deregulated generation business.
   
• Reducing regulatory uncertainty through successfully managing restructuring proceedings in Ohio, Virginia, and West Virginia. (Restructuring proceedings in Pennsylvania and Maryland, representing more than one-half of all of our regulated customers, have already been brought to positive closure.)
   
• Increasing tax planning opportunities with the growth of our nonutility businesses.
   
• Repurchasing common stock when appropriate.

We also expect that our increased efforts in working with the investment community will create additional support for our high-level growth strategy. Our leadership will visit various major financial centers and key investment decision-makers to outline our growth initiatives, while continuing a strong, consistent communications effort with all investors, potential investors, and analysts.

We are confident that Allegheny Energy’s focus on our core competencies in a growing region, along with our telecommunications and unregulated energy services businesses, will deliver tremendous value to our shareholders in the year 2000 and beyond.