Fitch Upgrades Allegheny Energy & Supply's IDR to 'BBB-': Outlook Stable

Business Wire, Dec 28, 2007

NEW YORK -- Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) and outstanding debt ratings of Allegheny Energy, Inc. and subsidiaries as follows:

Allegheny Energy, Inc. (AYE)

--IDR to 'BBB-' from 'BB '.

Allegheny Energy Supply Company, LLC (Supply)

--IDR to 'BBB-' from 'BB '.

--Senior secured to 'BBB' from 'BBB-'.

--Senior unsecured to 'BBB-' from 'BB '.

Allegheny Generating Co.

--IDR to 'BBB-' from 'BB '.

--Senior unsecured to 'BBB-' from 'BB '.

The Rating Outlook is Stable.

The ratings of AYE's three regulated utility subsidiaries: West Penn Power Company (West Penn; IDR rated 'BBB-', Outlook Stable), Monongahela Power Company (Mon Power; IDR rated 'BBB-', Outlook Stable) and Potomac Edison Company (Potomac Ed; IDR rated 'BB ', Outlook Negative) are unaffected by today's rating actions.

Fitch's rating upgrade of AYE and Supply to 'BBB-' reflects credit improvement resulting from increases in cash flow from higher realized prices on power sales, as well as lower debt balances and associated carrying costs. Consolidated debt has been reduced by approximately $2 billion over the past four years primarily with internal cash flow as well proceeds from asset sales. The ratios of (FFO Interest)/Interest for AYE on a consolidated basis and for the Supply subsidiary were approximately 4.6 times (x) and 4.4x for the twelve months ending Sept. 30, 2007, which are consistent with guidelines for the new ratings and the issuers' business and operating risk. The ratios of FFO to Debt exceeded 20% as of Sept. 30, 2007 for AYE and Supply.

AYE's ratings are supported by the following:

--Ownership of increasingly valuable coal-fired generation in PJM;

--Ample liquidity;

--Reasonable residential transition plans in PA and MD utility service territories; and

--Reinstatement of the energy adjustment clause in West Virginia.

Supply provides approximately 50% of AYE's consolidated cash flow and its contribution is expected to increase as higher power sales prices are realized.

For the next several years, AYE has limited long-term debt maturities. The parent company and Supply have access to two revolving credit facilities in the amounts of $400 million and $400 million, respectively, and also there is a system money pool. There was nearly $200 million of cash and equivalents as of Sept. 30, 2007 and cash balances were subsequently increased by West Penn's $275 million 5.95% first mortgage bond issuance in December 2007.

Fitch's rating concerns for the AYE group include risks for the following:

--Under-recovery or recovery lags in purchased power and other costs at the utilities;

--Adverse changes in retail market structure or regulation, increases in operating costs and capital spending;

--Stricter environmental regulations; and

--Prolonged outages of super-critical units.

While Supply had formerly been the greater source of Fitch's credit concerns, Fitch's current view is that there is greater risk to creditors at the utilities as a result of regulatory uncertainties.

AYE's Stable Outlook assumes that Maryland (MD) and Pennsylvania (PA) regulators permit full recovery of purchased power costs in tariffs following the expiry of the current rate settlements (Dec. 31, 2008 for MD residential load and Dec. 31, 2010 in PA). Approximately 25% of the Maryland residential customer power needs for the post-transition period was procured in an October 2007 auction and the second of four auctions is scheduled for January 2008. However, the MD Public Service Commission is considering changes to the market structure that could affect cash flows of AYE or its subsidiaries Supply or Potomac Ed.

The continued tightening of PJM Interconnection capacity markets bodes well for Supply as an owner of efficient baseload coal-fired power generation assets. Challenges for Supply include stricter emission standards, successful completion of the scrubber construction program, and improving plant operation factors. The initiation of carbon limits could affect credit because approximately 95% of energy is generated with coal. Fitch anticipates some improvement in unit availability of the company's major coal plants as a result of completion of major maintenance projects in 2007. However, Fitch considers management's availability goal of 91% for 2008 to be aggressive given plant operating track records over the past five years, (reduced maintenance outages should lead to some improvement in 2008 from the 84% estimated 2007 availability). There has been steady progress on the Hatfield and Fort Martin scrubber projects and construction budgets are still on track for $550 million and $725 million, respectively and a significant majority of the remaining scrubber budgets are fixed.

The upgrade of Allegheny Generating Co. results from the upgrade of its 59% owner, Supply. Allegheny Generating's single asset is an interest in the Bath County pumped storage unit. It has consistently strong stand-alone credit metrics with (FFO Interest)/Interest of approximately 6x.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.