Fitch Ratings Lowers Allegheny Energy & Subs; Remains On Rating Watch Negative

Business Wire, Jan 9, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 9, 2003

Fitch Ratings has lowered the ratings of Allegheny Energy, Inc. (AYE) and its subsidiaries, Allegheny Energy Supply Co. LLC (AE Supply), Monongahela Power Company (MP), Potomac Edison Company (PE), West Penn Power Company (WP), Allegheny Generating Company (AGC) and AE Supply's special purpose entity Allegheny Energy Supply Statutory Trust 2001. The ratings of the above entities remain on Rating Watch Negative. The affected ratings are listed below.

The rating downgrade of AYE and AE Supply assumes that AE Supply will successfully complete negotiations with its banks to replace existing credit facilities with new secured bank facilities. Currently, defaults on existing bank facilities of AE supply and AGC are waived until Jan. 14, 2003. AE Supply's new ratings consider the expected subordination of its senior unsecured debt to approximately $1.8 billion of new secured bank financing. The new ratings also incorporate Fitch's view that AE Supply's continued solvency over the next two years will depend on a stabilizing economy and recovering wholesale energy markets, the smooth restructuring of its trading operations and access to additional sources of funding or asset sales proceeds to repay secured loans. Positively, the majority of AE Supply's revenues going forward is projected to come from supplying the provider of last resort obligation load to its regulated utility affiliates, since the contribution from trading and marketing activities will fall precipitously compared to previous forecasts. Fitch expects AE Supply's coverage ratios to be around the 1.5 times (x) range and its debt-to-EBITDA ratio to be above 8x due to higher leverage and interest expenses. While new secured bank loan facilities are expected to have a priority position relative to existing unsecured creditors, there appears to be adequate asset coverage for the aggregate of over $3.5 billion of total debt (secured and unsecured) even taking into consideration reduced market valuations and constrained liquidity in the power market.

AYE's ratings are based on the collective cash flows of its three regulated utility companies, WP, MP, and PE, and those of unregulated generation company Allegheny Energy Supply. AYE's downgrade reflects the weakened profile of AE Supply and AYE's potential exposures to AE Supply through $230 million of financial guarantees. AE Supply is expected to contribute to about 50% of consolidated EBITDA in 2003. The other half of AYE's consolidated EBITDA is derived from the stable and predictable revenue stream of regulated utilities, which have limited exposure to supply and market price risk. In 2003 AYE is expected to rely principally on the upstream dividends from the regulated utilities to service its standalone debt and pay for corporate overheads.

The downgrade of AYE's regulated subsidiaries WP, PE, and MP reflects Fitch's policy regarding the linkage of ratings of subsidiaries with those of a lower-rated parent. On a stand-alone basis, these three regulated utilities have a credit profile that is comparable to companies in a the low 'A' or upper 'BBB' rating categories. Nevertheless, these companies could experience some stress due to the financial distress of their parent.

The downgrade of AGC's rating was triggered by its majority ownership by AE Supply and its reliance on AE Supply for its revenues. Currently AGC's output is sold to AE Supply and marketed by AE Supply's trading arm Allegheny Energy Global Markets and the energy is available to serve AE Supply's long term supply contracts with its regulated utility affiliates or for sale in the wholesale market.

AE Supply Trust's downgrade was also occasioned by the downgrade of AE Supply. AE Supply Trust's rating reflects AE Supply's obligation to make rental and other payments that cover the interest and principal payments of the notes issued by the Trust and other related agreements associated with the notes.

Once the new bank facilities are closed and the risks associated with the defaults is resolved, Fitch expects to assign a Negative Rating Outlook to the Allegheny group to reflect the uncertainties surrounding the outlook of AE Supply. The Rating Outlook of the Allegheny group AYE could stabilize if it successfully secures additional external funding, including proceeds from the monetization of assets, to meet its debt and loan maturity schedules in 2003 and 2004. Should AE Supply fail to resolve the current negotiations with it banks, its ratings and those of its affiliates would be downgraded further.

The ratings affected are listed below:

Allegheny Energy, Inc.

--Senior unsecured debt lowered to 'B ' from 'BB';

--Remains on Rating Watch Negative.

West Penn Power Company

--Medium-term notes lowered to 'BB ' from 'BBB-';

--Remains on Rating Watch Negative.

Potomac Edison Company

--First mortgage bonds lowered to 'BBB-' from 'BBB';

--Senior unsecured notes lowered to 'BB' from 'BBB-';

--Commercial paper lowered to 'F3' from 'F2' and withdrawn;