Fitch Affirms PEPCO Holdings & PCI; Outlook Revised to Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 9, 2003

Fitch Ratings has affirmed PEPCO Holdings' (PHI) senior unsecured debt at 'BBB+' and its commercial paper rating at 'F2', while revising the Rating Outlook to Negative from Stable. Additionally, Fitch affirmed the senior unsecured debt rating of Potomac Capital Investment Corp. (PCI) at 'BBB+' and revised the Rating Outlook to Negative. The PCI rating reflects PHI's unconditional guarantee of this debt. Fitch also affirmed ratings of other PHI subsidiaries as detailed in the table below. The Rating Outlook of Atlantic City Electric is revised to Positive from Stable, while the outlook is Stable for Delmarva Power and Light, Potomac Electric Power, and Conectiv.

The change in PHI's Rating Outlook to Negative reflects continued high parent debt leverage and the uncertain prospects for reducing parent debt over the next couple of years. Debt incurred to finance the 2002 acquisition of Conectiv (CIV) has not been retired at the pace that Fitch originally anticipated. PHI's free cash flow during 2003 was hampered by gas trading losses, low spark spreads, mild summer weather and unanticipated capital expenditures related to Hurricane Isabel. Challenges to debt reduction during 2004 and 2005 include higher prices paid on the Mirant Corp. transitional power agreements (TPA), potential losses if Mirant succeeds in rejecting back-to-back obligations, and continuing distribution rate caps that prevent recovery of higher pension costs and storm expenses. The group's consolidated debt-to-EBITDA and cash flow measures of interest coverage are projected to remain weaker than is typical in the 'BBB+' rating category in 2004.

The affirmation of PHI's ratings reflects the predictable cash flows from three distribution utilities (accounting for over 70% of consolidated EBITDA), ample system liquidity, and the company's effectiveness at managing the risks of its non-regulated businesses. The rating affirmation anticipates that PHI will have sufficient cash flow to make progress toward reduction of parent and consolidated debt over the next three to four years. Going forward, positive rating actions for PHI or PCI depend on PHI's ability to reduce parent and consolidated debt, while continued weakness in cash flow measures and inability to reduce parent and consolidated debt would result in negative rating actions. Also, ratings of CIV, PHI, and PCI could be adversely affected if CIV's subsidiary Conectiv Energy Holdings (CEH) fails to hedge its risks effectively or is unable to negotiate new off-take contracts at the expiration of current power sales contracts.

Ratings of PHI and its direct subsidiary Conectiv incorporate the somewhat higher business risk profile of competitive generation and energy marketing business of subsidiary CEH. With the completion of new units currently under construction in Bethlehem, PA by late 2003, CEH's gas-fired generation portfolio will grow to approximately 3,500 MW. A number of turbines were scheduled for delivery this year, but PHI announced in April 2003 that it had terminated all remaining turbine orders and no additional units are firmly committed. CEH sells its generation output under near-to-intermediate-term contracts, including a 'full requirements' contract with affiliate Delmarva Power and Light Co. (DPL) to meet its standard offer obligation through 2006. The off-take contracts substantially hedge market price exposure, but CEH and PHI remain exposed to the volumetric and credit risks associated with the contract portfolio. After the expiration of existing contracts (around 2006), Fitch assumes that the capacity will be marketed at prevailing market prices under new contracts or in the spot market.

At fiscal year-end 2003, PHI's consolidated adjusted ratio of debt-to-EBITDA is expected to exceed 4.5 times (x), though the company has committed to continue to reduce debt with available free cash flows. Any additional costs incurred as a result of any successful rejection by Mirant of certain contracts (explained in greater detail below) will divert cash from this planned debt reduction and could adversely affect PHI's credit profile. As a result of recent asset sales, cash on hand and availability under existing revolving credit facilities, PHI currently has sufficient liquidity to meet all expected needs as well as potential losses that might result from Mirant's rejection of the back-to-back power purchase agreements. Total capital expenditures over the next four years are forecast at $2.2 billion, with the majority related to the maintenance and expansion of PHI's utility systems. Approximately $2.4 billion in total PHI debt matures over the next four years, including $1 billion at the parent level.

The Rating Outlook of Atlantic City Electric is revised to Positive from Stable, reflecting actual and projected corporate debt reduction and increased tariff flexibility as a result of the end of the utility's tariff cap on Aug. 1, 2003. The ratings of subsidiaries DPL and Atlantic City Electric are affirmed. These utilities' ratings are supported by the stable cash flows of their regulated businesses, strong credit ratios and commodity price risk that is hedged via full requirements contracts. Ratings of these entities currently reflect their individual credit profiles and are not constrained by the rating of their parent.

Ratings of subsidiary Potomac Electric Power Co. (PEPCO) are affirmed and the Ratings Outlook remains Stable, despite continuing financial exposure to Mirant Corp. on obligations related to power purchase agreements (PPAs). The rating affirmation reflects the long-term predictability of PEPCO's cash flows, strong credit ratios and ample liquidity. PEPCO's obligation to provide power to ultimate consumers at standard offer prices has been extended by up to four years in Maryland under a plan that will allow the utility to recover the costs of standard offer supply plus a profit margin. As a result of its generation asset divestitures during 2000 and 2001 and a company restructuring relating to its 2002 merger with Conectiv, PEPCO operates as a pure transmission and distribution utility.

In August 2003, Mirant rejected two 'back-to-back' agreements that required Mirant to purchase power from PEPCO at prices significantly above current forward market prices. PEPCO itself purchases this power from FirstEnergy Corp. and Panda-Brandywine, L.P. under contracts that run through 2005 and 2021, respectively. PEPCO has estimated the exposure to additional costs, if the rejection of these contracts is ultimately approved, at approximately $230 million through 2005, and $35-$40 million per year thereafter. PEPCO would first attempt to recoup these costs as an unsecured creditor in Mirant's bankruptcy proceedings and would then seek recovery of any remaining balance from ratepayers. Fitch views the likelihood of recovery of a significant part of the costs related to these two obligations either in bankruptcy court or from ratepayers as reasonable, though the probable lag of such recovery would pressure cash flows in the near term.

PEPCO's power supply under the transitional power agreements is assured, albeit at higher cost, as PHI and Mirant recently reached a settlement agreement that renegotiated the terms of two TPAs to provide power to PEPCO's standard offer customers in Maryland and the District of Columbia through June 2004, and January 2005, respectively. An amended settlement agreement was approved by the bankruptcy court in November 2003, resulting in higher contract pricing that will increase costs to PEPCO by $60 million (pre-tax) over the duration of the TPAs.

Ratings are affirmed and Rating Outlook revised to Negative from Stable for the following two companies:

Pepco Holdings, Inc.

-- Senior unsecured debt 'BBB+';

-- Commercial paper 'F2';

-- Rating Outlook Negative.

Potomac Capital Investment Corp. (Guaranteed by PEPCO Holdings, Inc.)

-- Senior unsecured debt 'BBB+';

-- Rating Outlook Negative.

Ratings are affirmed and the Rating Outlook revised to Positive from Stable:

Atlantic City Electric Co.

-- Senior secured 'A-';

-- Senior unsecured 'BBB+';

-- Preferred stock 'BBB';

-- Commercial paper 'F2';

-- Rating Outlook Positive.

Ratings are affirmed and the Ratings Outlook remain Stable at the following subsidiaries:

Potomac Electric Power Co.

-- Senior secured 'A';

-- Senior unsecured 'A-';

-- Preferred stock 'BBB+';

-- Commercial paper 'F1';

-- Rating Outlook Stable.

Delmarva Power and Light Co.

-- Senior secured 'A';

-- Senior unsecured 'A-';

-- Preferred stock 'BBB+';

-- Rating Outlook Stable.

Conectiv

-- Senior unsecured 'BBB+';

-- Rating Outlook Stable.