Fitch Upgrades Allegheny Energy & Allegheny Energy Supply's IDR To 'BB+'.

NEW YORK -- Fitch upgrades the Issuer Default Rating (IDR) and senior unsecured debt ratings of Allegheny Energy, Inc. (AYE) to 'BB+' from 'BB-'. The ratings of Allegheny Energy Supply Company, LLC, (AE Supply) and Allegheny Generating Company (AGC) (AYE's non-regulated subsidiaries) have also been upgraded by Fitch. The Rating Outlook for AYE, AE Supply and AGC is Stable. Fitch has also affirmed the ratings of regulated utility subsidiaries Monongahela Power Company, (Mon Power); West Penn Power Company (WP); and The Potomac Edison Company (PE) with a Stable Rating Outlook. The full list of ratings and Rating Outlooks is below.

The positive ratings actions for AYE and AE Supply are based on debt reductions and increases in cash flow generation at AE Supply and reduced business risk of the group. AYE reduced consolidated debt by $2 billion to approximately $4 billion between December 2003 and March 2006. Liquidity increased and interest rate margins were reduced through progressive rounds of bank facility refinancings completed at AYE and AE Supply, most recently in May 2006. Business risk has been substantially reduced over the past two years through the sales of gas-fired merchant generation capacity located outside of the home PJM region and earlier exit from non-PJM wholesale power trading activities as well as through improvements in financial reporting and controls. The upgrade of AGC reflects the upgrade of its 77% owner, AE Supply, as well as its strong credit ratios and low business risk as the owner of an interest in a pumped storage generation facility.

Primary credit concerns for AYE include the risks of: adverse regulatory decisions at the utilities that result in the inability of WP and PE to recover transmission, distribution or power purchase costs following the expiration of existing power purchase agreements and rate settlements; under-recovery of fuel costs at Mon Power; risks associated with plant outages and rising emissions compliance related spending in the generation segment, and still below-investment grade cash flow coverage and leverage ratios for the consolidated group. AYE's consolidated ratio of FFO interest coverage ratio was 2.15 times (x) (ratio includes securitization adjustments and one-time items) for the twelve months ended March 31, 2006. In addition, changes to environmental law or adverse decisions in emissions-related lawsuits pose risks to credit quality.

The Stable Rating Outlook for AYE and AE Supply considers Fitch's expectation that while the improving trends in interest coverage and debt-leverage ratios will continue at AE Supply due to increased cash flow generation and additional debt reduction, the pace of improvement will be gradual. AE Supply's cash flow should improve as a result of annual rate increases in WP's POLR generation rates that will be passed through to AE Supply and growth in the percentage of total power sales made at higher PJM market rates, assuming no prolonged outages at base-load generation plants.

The ratings and Stable Rating Outlooks of WP and PE incorporate Fitch's expectation that the utilities' leverage ratios will increase and coverage ratios will decrease as a result of upward cost pressures and increasing capital spending needs, but capital structures and credit ratios will remain consistent with, or better than the norms for their ratings category. The highly politicized climate and uncertain ultimate market structure in Maryland is a concern for PE. The residential generation rate cap and associated power supply contract for the Maryland portion of PE's service territory terminate at the end of 2008, but PE retains residential POLR obligations through 2012. While rates for transmission and distribution are not capped in Maryland, no near term rate filing is anticipated. WP has generation rate certainty through 2010 and has hedged the associated power supply needs. WP's distribution rates in PA are capped through 2007.

The Stable Outlook of Mon Power assumes balanced outcomes in the upcoming fuel and base rate proceedings at the West Virginia Public Service Commission, which will contribute to future improvement in credit ratios. The ratings of Mon Power reflect the benefits of ownership of interests in coal fired generation plants in PJM, the lack of competition in its West Virginia franchise service area, and adequate liquidity. The sales of laggard utility operations, Mountaineer Gas and the Ohio transmission and distribution assets in 2005 should benefit profit margins. The ratings also incorporate concerns regarding the recovery of increased costs in a historically less favorable regulatory environment in West Virginia, increasing capital spending needs for plant upgrades and risks associated with emissions-related construction activities and legal proceedings. Mon Power is exposed to fuel price risk as it continues to operate under a moratorium of the fuel cost adjustment mechanism in West Virginia. However, a favorable decision by the West Virginia PSC to re-start the fuel adjustment mechanism in 2007 would lower this risk and a related filing with the PSC is expected within the next month.

Fitch has upgraded the following ratings:

Allegheny Energy, Inc.:

-- Issuer Default Rating (IDR) to 'BB+' from 'BB-';

-- Senior unsecured debt to 'BB+' from 'BB-'.

Allegheny Energy Supply, LLC:

-- Issuer Default Rating (IDR) to 'BB' from 'B+';

-- Senior secured debt to 'BBB-' from 'BB+';

-- Senior unsecured debt to 'BB+' from 'BB-'.

Allegheny Generating Company:

-- Issuer Default Rating (IDR) to 'BB' from 'B+'.

Fitch has also affirmed the following ratings:

Allegheny Generating Company:

-- Senior unsecured debt 'BB+'.

Monongahela Power Company:

-- Issuer Default Rating (IDR) 'BBB-';

-- First mortgage bonds 'BBB+';

-- Senior unsecured debt 'BBB-';

-- Preferred securities 'BB+'.

West Penn Power Company:

-- Issuer Default Rating (IDR) 'BBB-';

-- Senior unsecured 'BBB-'.

The Potomac Edison Company:

-- Issuer Default Rating (IDR) 'BBB-';

-- First mortgage bonds 'BBB+';

-- Senior unsecured debt 'BBB-'.

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.