Fitch: Monongahela Outlook to Stbl, Affms Allegheny Energy & Subsidiaries Rtgs.

NEW YORK -- Fitch Ratings has revised the Rating Outlook of Monongahela Power Company (Monongahela) to Stable from Negative. Approximately $838 million of debt securities are affected. At the same time, Fitch has affirmed the existing ratings of Allegheny Energy, Inc. (Allegheny) and subsidiaries as listed below. The Rating Outlooks for all issuers in the Allegheny Energy group are Stable.

The revision of Monongahela's Outlook to Stable is based on the successful execution of additional coal supply contracts for 2005 and 2006, the return to service of baseload coal-fired generation units at the Hatfield's Ferry and Pleasants plants prior to the start of peak seasonal demand, and the expectation that operating and maintenance expenses will trend down. The new coal supply contracts increase the hedged percentage of 2005 and 2006 coal supply needs to 90% and 50%, respectively, and alleviate near term commodity price risk. The all-in average prices for the locked in portion of coal supply are approximately $34 for 2005 and Fitch estimates it will be approximately $36.10 for 2006, which are well below the current spot market price of Appalachian coal. While the restoration of the major coal-fired units to service ended the cash losses associated with purchasing replacement power at higher cost, the company continues to be at risk for any future outages under Monongahela's current retail tariffs. Monongahela is unable to recover the costs of replacement supply in either West Virginia or Ohio, and no near-term change is expected. A successful closing of the recently announced sale of Mountaineer Gas would be positive for credit quality. Mountaineer Gas has been a persistent drag on profitability and the proceeds from any sale are anticipated to be used for debt reduction. However, the closing of the transaction is subject to material regulatory contingencies.

The affirmation of the 'BB-' senior unsecured rating and Stable Rating Outlook of the group parent, Allegheny, reflects the new management's ongoing progress in restructuring efforts and debt reduction and adequate parent company liquidity, as well as the high consolidated leverage and weak cash flow coverage ratios. Allegheny's rating reflects Fitch's expectation that Allegheny would continue to provide support to the leveraged Allegheny Energy Supply (Supply) subsidiary as well as the cash flow from the stronger, more stable regulated utility subsidiaries. Execution of the remainder of the $1.5 billion debt reduction plan by year-end 2005, improvement in cash flow generation at Supply, improvements in plant operating performance and expense control, and rate relief would improve credit quality. Credit concerns include the risks of extended plant outages, rising environmental compliance costs, adverse regulatory or judicial decisions, and commodity price exposure (2006 and beyond).

The affirmation of Supply's 'B-' senior unsecured rating and Stable Rating Outlook is based on the generation company's high leverage and weak profitability. Improvement in credit quality is dependent on the success of debt reduction and cost reduction efforts. Historically, Supply produced insufficient cash flow to cover interest expense and has therefore been dependent upon parent support. The $1.25 billion bank credit facilities, which closed in March 2004 and mature in 2011, reduce interest expense and provide liquidity. Supply benefits from a strategically located fleet of mostly coal-fired generation plants in PJM West and affiliate contracts that provide a large degree of certainty to revenues for the next several years. However, Supply bears the risks of extended plant outages, increases in fuel prices after 2005, and emissions-related issues.

The affirmation of the 'BBB-' senior unsecured ratings and Stable Rating Outlooks of West Penn Power Company and Potomac Edison Company reflects their low business risk as transmission and distribution utilities, as well as the ratings constraint stemming from business and financial linkages with the Allegheny group. The location of their service territories in the robust PJM market bodes well for the breadth of future power purchase opportunities. Concerns include the risk that regulators may extend rate caps beyond the current transition periods at levels that are below the cost of power supply.

Ratings affirmed are:

Allegheny Energy, Inc.

-- Senior unsecured debt 'BB-';

-- 11 7/8% notes due 2008 'B+'.

Allegheny Capital Trust I

--Trust preferred stock 'B+'.

Allegheny Energy Supply Company LLC 

-- Senior unsecured notes 'B-'.

Allegheny Generating Company

-- Senior unsecured debentures 'B-'.

Allegheny Energy Supply Company LLC

-- Pollution control bonds (MBIA-Insured) 'AAA'.

West Penn Power Company

-- Medium-term notes and senior unsecured 'BBB-'.

Potomac Edison Company

-- First mortgage bonds 'BBB';

-- Senior unsecured notes 'BBB-'.

Monongahela Power Company

-- First mortgage bonds 'BBB';

-- Medium-term notes 'BBB-';

-- Pollution control revenue bonds (unsecured) 'BBB-';

-- Preferred stock 'BB+'.