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Rating Action:

MOODY'S CONTINUES REVIEWS OF ALLEGHENY ENERGY AND DUQUESNE LIGHT RATINGS

29 Jul 1998
MOODY'S CONTINUES REVIEWS OF ALLEGHENY ENERGY AND DUQUESNE LIGHT RATINGS New York, 07-29-98 -- Moody's Investors Service announced today that it will continue the reviews of the ratings of Allegheny Energy, Inc. and its utility affiliates and of the ratings of Duquesne Light, the utility subsidiary of Allegheny's merger partner, DQE, Inc. Both companies' ratings were put on review in April 1997 when they announced their intention to merge.

The reviews are likely to continue into the fall to include not only merger developments, but also the results of any possible settlement negotiations over Allegheny's Pennsylvania utility West Penn Power's restructuring case. At the time the review commenced, Moody's assumed that the Pennsylvania restructuring cases would result in stranded cost recovery amounts that are reasonable from an investor's standpoint as the restructuring legislation arose from consensus among all the major interested parties. Since then, the political climate changed, and the restructuring orders, particularly for high-cost PECO Energy and low-cost West Penn Power, have been very favorable to ratepayers at the expense of utility investors. The restructuring proceedings have therefore become an even larger credit consideration than the merger itself. Further, any merger savings are largely netted against stranded cost recovery and therefore, under current arrangements, provide no future benefit to investors. Revised merger conditions continue to involve the Pennsylvania commission in strategic decisions relating to generating assets with no upside for the utilities, maintaining the regulatory uncertainty.

While the companies' announcements of write-offs weaken balance sheet leverage, the reviews will focus on the much more important cash flow implications of the restructuring and related strategic issues such as dividend policy and each company's ability to achieve additional efficiencies. In particular Moody's will examine each company's ability to operate under the state's approach to restructuring with its fixed stranded cost recovery amounts based upon fully-loaded costs in the face of uncertain market prices of power over the transition period that are more likely to reflect the marginal cost of power due to excess capacity in the region. This approach increases the risk that actual stranded costs could be much higher than the amounts being recovered.

The A1 senior secured ratings, A2 long-term issuer ratings, A3 subordinated debt ratings, and "a2" preferred stock ratings of Allegheny's utilities, West Penn Power, Potomac Edison, and Monongahela Power; the P-1 commercial paper ratings of Allegheny Energy, its utility subsidiaries, and Allegheny Generating; and the A2 senior unsecured rating of Allegheny Generating remain under review for possible downgrade. Duquesne Light's senior secured rating of Baa1, its Baa2 senior unsecured and long-term issuer ratings, its "baa3" preferred stock rating, and its P-2 commercial paper rating remain under review for possible upgrade.

Allegheny Energy, headquartered in Hagerstown, Maryland, serves electric customers in Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. Duquesne Light, headquartered in Pittsburgh, serves electric customers in western Pennsylvania.

No Related Data.
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