Fitch Dwngr AYE, Potomac Ed, & Monongahela: Aff West Penn Power, AGC.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 19, 2001

Fitch has downgraded Allegheny Energy, Inc.'s (AYE) senior unsecured debt from `A` to `A-' and affirmed the commercial paper rating at `F1'. Fitch also downgraded the senior secured debt ratings of Monongahela Power Company's (MP) and The Potomac Edison Company's (PE) from `AA-` to `A+', and commercial paper ratings from `F1+' to `F1'. The downgrade at the parent company reflects the lower ratings of the regulated utilities and the increasing earnings contribution and aggressive growth of the company's unregulated generation subsidiary, Allegheny Energy Supply, LLC. The lower ratings of MP and PE are due to weakened financial protection measures. Fitch has affirmed West Penn Power Company's (WPP) `A+' senior unsecured debt rating, but lowered the commercial paper rating to `F1'. Fitch also affirmed Allegheny Generation Company's (AGC) `BBB+' senior unsecured debt and `F2' commercial paper rating. The Rating Outlook for AYE and each of the operating subsidiaries is Stable.

AYE's ratings are based on the collective cash flows of its three regulated utility companies, WPP, MP, and PE, and those of its unregulated generation subsidiary, AE Supply. The three regulated utilities currently account for about 67% and 77% of AYE's operating revenues and EBITDA, respectively - providing a stable and predictable revenue stream. The distribution companies'exposure to supply and market price risk is limited by their supply contract with AE Supply. By 2005, AE Supply will expand its generation business, and the unregulated subsidiary will account for the majority of AYE's consolidated cash flow. In addition, while most of AE Supply's revenues are currently supported by long term contracts with its affiliated distribution companies, the purely merchant derived revenues will rise considerably (to 40% of operating revenues) by 2005.

Our analysis incorporated AYE's acquisition of three generation plants located in the Midwest from Enron (acquisition expected to close mid-2001), and AE Supply's contemplated 20% IPO later this year. AYE intends to finance the Midwest asset acquisition with approximately $500 million of new equity and the balance, $528 million, of debt. If undertaken, approximately half of the projected $1 billion IPO proceeds could be provided to AYE to pay down short-term debt at the parent level.

AYE's financial profile will be strong during the projection period and consistent with the higher business risk from the non-regulated merchant generation subsidiary. Credit risks include managing the planned growth at AE Supply and its commodity price exposure and potential impact of stricter environmental standards, given the company's predominantly coal-fired generating base. Consolidated credit protection measures are expected to be relatively healthy over the next several years, with EBITDA interest coverage of over 4.5 times (x) and debt/EBITDA below 3x. On a book basis, consolidated leverage will decline from 2000's debt ratio of 65% to 42% by 2005.

The revised ratings of PE and MP reflect a combination of lower revenues and higher leverage following the asset transfers, the transitioning to a deregulated environment in the various states, and MP's acquisition of Mountaineer Gas Company (natural gas distribution entity). PE has transferred most of its generating assets to AE Supply while MP plans to transfer its assets in Ohio and West Virginia during 2001. PE's pretax interest coverage and EBITDA/interest are expected to decline from the five-year historical average of 3.5x and 5x to the projected five-year average of 2.7x and 3.6x levels, respectively. Debt/EBITDA will increase from historical average of 2.6x to projected 3.3x -3.5x for both companies. During the generation rate cap periods, each of the distribution subsidiaries have or intend to mitigate the commodity price and volume risk via long term contracts with AE Supply, substantially shifting the risk to the generation supplier.

The affirmation of the senior unsecured debt of West Penn reflects the companies' strong cash flows and healthy balance sheets as it now operates as a pure distribution company. West Penn Power is expected to maintain pre-tax interest and EBITDA interest coverage ratios (including the securitization bonds) of approximately 3.5x and 5x over the forecast period. The downgrade of its commercial paper is a function of close interrelationship among all three regulated subsidiaries which share a money pool with the parent for short term liquidity purposes.

Lastly, the pollution control revenue bonds issued by PE and WPP are rated `AAA' and removed from the distribution utilities' respective balance sheets. The obligation is essentially transferred to AE Supply and fully supported by a surety bond provided by MBIA Insurance Corporation, whose insurer financial strength is rated `AAA' by Fitch. The surety bond provides an unconditional and irrevocable guarantee on the payment of principal and interest on the pollution control bonds through the life of the bonds.

AE is a registered utility holding company, which owns three regulated utilities, Monongahela Power, Potomac Edison and West Penn Power and two non-utility subsidiaries. The utilities deliver electric and gas service to 1.6 million customers in parts of Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. AYE's non-utility subsidiaries consist of AE Supply which develops, acquires, owns and operates generating plants and is a marketer of electricity and other energy products and Allegheny Ventures which is involved in telecommunications and energy related projects.

The ratings of Allegheny Energy, Inc. and its subsidiaries are as follows:

Allegheny Energy, Inc.

-- Senior Unsecured debt downgraded to `A-` from `A';

-- Commercial paper affirmed at `F1'.

West Penn Power Company

-- Medium term notes affirmed at 'A+';

-- Jr. subordinated debentures(a) affirmed at 'A';

-- Commercial paper downgraded to 'F1' from 'F1+';

-- Pollution control revenue bonds withdraw rating for WPP;

transfer obligation to AE Supply and upgrade to `AAA' (MBIA

surety).

West Penn Funding LLC

-- Transition bonds affirmed at 'AAA'.

Monongahela Power Company

-- First mortgage bonds downgraded to 'A+' from `AA-`;

-- Medium term notes downgraded to 'A' from `A+';

-- Pollution control revenue bonds (unsecured) downgraded to 'A'

from `A+';

-- Jr. subordinated debentures(a) downgraded to 'A-' from 'A';

-- Preferred stock downgraded to 'A-' from 'A';

-- Commercial paper downgraded to 'F1' from `F1+'.

Potomac Edison Company

-- First mortgage bonds downgraded to `A+' from 'AA-';

-- Jr. subordinated debentures(a) downgraded to 'A-' from 'A';

-- Commercial paper downgraded to `F1' from 'F1+';

-- Pollution control revenue bonds withdraw rating for PE;

transfer obligation to AE Supply and upgrade to `AAA' (MBIA

surety).

Allegheny Generating Company

-- Senior unsecured debentures affirmed at 'BBB+';

-- Commercial paper affirmed at 'F2'.

(a) Note: quarterly income debt securities.