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Rating Action:

Moody's upgrades Allegheny Energy's ratings

07 Sep 2007
Moody's upgrades Allegheny Energy's ratings

Approximately $2.5 Billion of Debt Securities Affected.

New York, September 07, 2007 -- Moody's Investors Service upgraded the long-term ratings of Allegheny Energy, Inc. (AYE: senior unsecured bank facility to Ba1 from Ba2) and its generation subsidiaries, Allegheny Energy Supply Corporation, LLC (AYE Supply: senior unsecured to Ba1 from Ba3) and Allegheny Generation Company (AGC: senior unsecured to Baa3 from Ba3), concluding a review for possible upgrade that commenced on August 8, 2007. The rating outlook for AYE, AYE Supply and AGC is stable.

Moody's also upgraded the AYE's Corporate Family Rating to Baa3 from Ba2 and AYE Supply's Corporate Family Rating to Baa3 from Ba2. Moody's intends to withdraw the Corporate Family Rating of both AYE and AYE Supply as the Corporate Family Rating is only used for speculative grade issuers. Additionally, Moody's has withdrawn the Speculative Grade Liquidity rating for AYE, the Probability of Default Rating for AYE and AYE Supply, and all loss given default assessments (LGDs) associated with both issuers.

The rating upgrade at AYE and at AYE Supply reflects the continued improvement in financial performance due to the combined effect of permanent debt reductions following the completion of several prominent asset sales, better operating performance throughout the AYE system, and improved margins due to higher wholesale prices for electricity. For 2006 and twelve months ending June 30, 2007, AYE's consolidated cash flow (CFO pre-W/C) to adjusted debt approximated 20% and consolidated cash flow coverage of interest expense was 4.0x. Similarly, at AYE Supply, which is the principal driver for AYE's earnings and cash flow improvement, the ratio of consolidated cash flow to adjusted debt was 17% and 20%, respectively, for 2006 and 12 months ending June 30, 2007, while AYE Supply's cash flow coverage of interest expense was 3.3x and 4.0x for the same 12 month periods, respectively. Importantly, Moody's anticipates that financial results for 2007 and 2008 are likely to exceed these levels due principally to higher regional power prices, including those associated with the AYE's provider of last resort (POLR) obligation at utility affiliates. Moody's estimates that through the end of 2010 at least 70% of the company's operating margin has been hedged through regulatory arrangements, POLR obligations, or forward market contracts, all of which suggests a relatively high probability of financial metric improvement from 2006 and June 30, 2007 levels.

The rating upgrades also consider the sizeable capital expenditure program being implemented throughout the AYE system, principally for environmentally related requirements, and recognizes that a meaningful portion of these costs have already been pre-funded through the issuance of securitization bonds during the second quarter 2007. The rating upgrades further factor in AYE's relatively lower risk growth strategy that features substantial investment in FERC regulated transmission projects located in close proximity to AYE's service territory. The upgrades acknowledge the challenges that the company faces in addressing state regulatory transition issues in Virginia, Maryland, and Pennsylvania, which could affect the future financial performance of its regulated subsidiaries.

The rating upgrade at AGC incorporates a high expectation that the strong standalone financial results are likely to continue given the highly predictable nature of its FERC regulated cost of service model for determining revenues. The upgrade also takes into consideration the financial improvement at AYE Supply, which still owns 59% of AGC and has access to a similar amount of the capacity generated by AGC. Moody's observes that prior to the asset swap among AYE Supply and affiliate Monongahela Power Company (MPC: Baa3 senior unsecured) that took place earlier this year, AGC's ownership and capacity obligations were heavily weighted towards AYE Supply, with this entity owning and having access to 77% of AGC's capacity. Beginning January 1, 2007, AGC's ownership and capacity obligations are more balanced with AYE Supply owning and having access to 59% of AGC's capacity and MPC owning and having access to the remaining 41%.

The Ba1 senior unsecured bank loan rating at AYE incorporates a degree of structural subordination that exists at the holding company relative to the substantial amount of debt at the four primary operating subsidiaries, as well as the lack of significant diversification across the AYE subsidiaries, given the regional proximity of the subsidiaries' business, the interrelationships that exist between subsidiaries and the fact that AYE operates as an integrated system.

The stable rating outlook for AYE, AYE Supply, and AGC reflects the continuation of strengthening and predicable earnings and cash flow at each of the legal entities over the next several years due principally to improved wholesale power prices, the majority of which has been determined through state or federally regulated arrangements with affiliates. The stable rating outlook incorporates an expectation that AYE's capital investment program will be financed in a manner that is reasonably conservative and that the previously announced intention to return capital to shareholders through the re-establishment of a dividend will be implemented in a manner that is neutral to credit quality. Moody's anticipates that the challenges that exist at each of the AYE's regulated utilities concerning transition related issues or rate case outcomes will be resolved in a manner that is benign to AYE's overall credit quality.

Upgrades:

..Issuer: Allegheny Energy Supply Company, LLC

...Corporate Family Rating, Upgraded to Baa3 from Ba2

.Senior Secured Bank Credit Facility, Upgraded to Baa2 from Baa3

......Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba3

..Issuer: Allegheny Energy, Inc.

...Corporate Family Rating, Upgraded to Baa3 from Ba2

....Senior Unsecured Bank Credit Facility, Upgraded to Ba1 from Ba2

..Issuer: Allegheny Generating Company

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba3

Outlook Actions:

..Issuer: Allegheny Energy Supply Company, LLC

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Allegheny Energy, Inc.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Allegheny Generating Company

....Outlook, Changed To Stable From Rating Under Review

Withdrawals:

..Issuer: Allegheny Energy Supply Company, LLC

...Probability of Default Rating, previously rated Ba2

....Senior Secured Bank Credit Facility, Withdrawn, previously rated 22 - LGD2

....Senior Unsecured Regular Bond/Debenture, Withdrawn, previously rated 77 - LGD5

..Issuer: Allegheny Energy, Inc.

...Speculative Grade Liquidity Rating, Withdrawn, previously rated SGL-2

....Probability of Default Rating, previously rated Ba2

....Senior Unsecured Bank Credit Facility, Withdrawn, previously rated 50 - LGD4

..Issuer: Allegheny Generating Company

....Senior Unsecured Regular Bond/Debenture, Withdrawn, previously rated 77 - LGD5

Headquartered in Greensburg, PA, AYE is an integrated investor-owned electric utility with total annual revenues of over $3 billion. The company owns and operates generating facilities and delivers electricity to over 1.5 million customers in Pennsylvania, West Virginia, Maryland and Virginia. AYE Supply and AGC are wholly-owned generating subsidiaries of AYE.

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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