Fitch Affirms Allegheny Energy and Subs' IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and debt ratings for Allegheny Energy, Inc. (Allegheny) and its subsidiaries as follows:

Allegheny:

--Long-term IDR at 'BBB-';

--Senior unsecured bank credit facility at 'BBB-'.

Allegheny Energy Supply Company, LLC (Supply):

--Long-term IDR at 'BBB-';

--Senior secured debt at 'BBB';

--Senior unsecured debt at 'BBB-';

--Senior unsecured term loan at 'BBB-';

--Senior unsecured bank credit facility at 'BBB-'.

Allegheny Generating Company (AGC):

--Long-term IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Monongahela Power Company d/b/a Allegheny Power (Mon Power):

--Long-term IDR at 'BBB-';

--Senior secured debt at 'BBB+';

--Senior unsecured debt at 'BBB-'.

The Potomac Edison Company d/b/a Allegheny Power (Potomac Ed):

--Long-term IDR at 'BBB-';

--Senior secured debt at 'BBB+'.

West Penn Power Company d/b/a Allegheny Power (West Penn):

--Long-term IDR at 'BBB-';

--Senior secured debt at 'BBB+';

--Senior unsecured debt at 'BBB-'.

The Rating Outlook for all entities is Stable.

Allegheny's ratings and Stable Outlook largely reflect the regulated operations of utilities Mon Power, Potomac Ed, and West Penn, which collectively do business as Allegheny Power, and the robust cash flows produced by the unregulated generating company, Supply. Ratings are further supported by the transition to market-rate pricing for power in Maryland (in progress) and Pennsylvania (expected in 2011). Rating concerns include a somewhat challenging regulatory environment, a generation base that is overwhelmingly dependent on coal, and exposure to volatile power prices.

Mon Power's ratings and Stable Outlook reflect this integrated utility's fully-regulated operations. The utility has benefited from its ability to fund flue-gas desulfurization equipment at Mon Power's Fort Martin generation facility with tariff-backed bonds and from the implementation of a fuel and purchased power recovery clause. However, there is approximately a one-year lag in recovering fuel and purchased power costs, which can result in large swings in cash flow during times of volatile power prices. Mon Power has also had difficulty getting requested rates of return and increases to base rates in recent West Virginia rate cases. Mon Power has a pending base rate case and has filed for fuel and purchased power cost recovery. Unfavorable decisions on these proceedings would further weaken the company's financial metrics and could result in negative ratings actions.

Potomac Ed's ratings and Stable Outlook are supported by an improved, yet somewhat challenging, regulatory environment in Virginia, Maryland, and West Virginia. The resolution at the end of 2008 of the company's fuel cost under-recovery problems and the favorably-priced power auctions in January 2009 provided a clear transition plan to market rates in Virginia. Potomac Ed's planned sale of its Virginia distribution assets for $340 million is expected to close by the first quarter of 2010 and should allow the company to focus on its operations in Maryland, where the majority of its customers are located, and West Virginia.

Potomac Ed's success in managing the transition to market rates in Maryland is favorable to ratings, although residential customer credits designed to reduce the impact of the rate cap expiration and maintain rate stability will depress the utility's cash flows through 2010. Starting on Jan. 1, 2011, cash flow metrics are expected to return to levels consistent with the current ratings. Since Jan. 1, 2009, Potomac Ed has been able to charge and recover its power supply costs in Maryland, which will diminish variations in cash flow caused by changes in power prices.

In West Virginia, Potomac Ed's operations are fully regulated, and the utility files rate cases jointly along with Mon Power. Potomac Ed therefore is affected by the West Virginia regulatory environment in the same mixed manner as Mon Power. The benefits of recovering fuel and purchased power costs are mitigated by the approximately one-year lag in fuel and purchased power cost recovery and prior difficulty in getting requested rates of return and increases to base rates.

West Penn's ratings and Stable Outlook reflect Fitch's assumption that West Penn's transition to market supply of power in 2011 will be smooth, and constructive regulation by the Pennsylvania Public Utility Commission (PPUC). West Penn is the provider-of-last-resort (PLR) for its customers and serves them at pre-determined capped rates that gradually increase through Dec. 31, 2010, after which time Pennsylvania moves to market-based pricing for power supply. In planning for this post-transition period, West Penn has already held two power auctions this year and procured more than 50% of its power needs for 2011, with the next auction scheduled for October and then three more spread throughout 2010. This managed transition to market rates is viewed favorably by Fitch and should provide for improved cash flows in 2010 and 2011. The PPUC's constructive regulation in the form of timely power cost recovery, the ability to hold early auctions for power supply in the post-transition period of 2011 and 2012, and the prior securitization of stranded costs has provided stability to the company's credit profile.

Supply's ratings and Stable Outlook consider the cash flow from the company's more than 7,000 megawatts (MWs) of generation capacity in the competitive PJM market as well as its dependence on coal as its primary fuel source. About two-thirds of Supply's generation serves West Penn's PLR customers through 2010 under contracts that do not require the posting of collateral. Following the expiration of those PLR contracts, the vast majority of Supply's power generation is unhedged. The company has begun entering into power supply contracts for the sale of its generation in 2011 and beyond and plans to gradually increase its contracted position over the next year. While current market prices for power are depressed, the company may still be able to realize some upside relative to the lower price it receives under West Penn's legacy PLR contracts. Supply's gross margins may be squeezed by increased prices for coal in the forward market and for contracted deliveries. Dependence on coal also leaves Supply vulnerable to climate change legislation and environmental regulations that have the potential to negatively affect operations and cash flows over the next decade, even though any environmental costs may eventually be reflected in higher power prices.

AGC's sole asset is a 40% interest (1,109 MWs) in a pump storage plant in Bath County, Virginia. Its ratings and Stable Outlook reflect the low-risk nature of its operations and are limited by the ratings on Supply and Mon Power, which own 59% and 41%, respectively, of AGC and are the takers of its power output.

--Financial profile - Fitch expects the utilities' financial profiles to improve over 2010 and 2011 due to the recovery of fuel and purchased power costs in West Virginia and the transition to market-rate pricing in Pennsylvania and Maryland. Increased cash flows from the operations at Allegheny's TrAIL Company and PATH, LLC transmission subsidiaries should provide additional support to the parent company. However, Fitch anticipates the possibility of slightly lower cash flows at Supply as a result of higher coal prices and relatively low power prices, which may persist due to sluggish demand for power and a weak recovery in the manufacturing sector. On a consolidated basis, Fitch expects financial metrics to remain in-line with recent performance, with funds from operations (FFO)-to-debt around 18% and EBITDA interest coverage of just under 4.0 times.

--Liquidity - Near-term liquidity is provided by near-full availability under Allegheny's $376 million revolving credit facility, full availability under Supply's $400 million revolving credit facility, an intercompany money pool for the utilities, and a $550 million credit facility at TrAIL Company. It is expected that Supply may boost its liquidity in the near future to help deal with the potential collateral postings associated with power supply contracts as the company continues to hedge its generation output in 2011 and beyond.

Allegheny is a holding company with subsidiaries that operate in three primary businesses: regulated delivery of power to 1.6 million customers in Pennsylvania, Maryland, West Virginia, and Virginia; generation of electricity in PJM; and transmission. Potomac Ed and West Penn are T&D subsidiaries, and Mon Power is a vertically integrated utility. Generation capacity is owned by Supply and its majority owned (and Mon Power's minority owned) subsidiary, AGC. Mon Power, Supply, and AGC produced a combined 46.6 million megawatt hours (MWh) of coal-fired generation in 2008. TrAIL Company and PATH, LLC are engaged in the development of the PJM transmission projects TrAIL and PATH, respectively.

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.

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