Fitch Downgrades PEPCO Holdings & PCI; Outlook Remains Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 19, 2004

Fitch Ratings has downgraded PEPCO Holdings' (PHI) senior unsecured debt to 'BBB' from 'BBB+' and affirmed its commercial paper rating at 'F2'. The Rating Outlook remains Negative. Additionally, Fitch lowered the senior unsecured debt rating of subsidiary Potomac Capital Investment Corp. (PCI) to 'BBB' from 'BBB+' and maintained its Negative Rating Outlook. The PCI rating reflects PHI's unconditional guarantee of this debt. Fitch also changed the Rating Outlook of subsidiaries Potomac Electric Power Co. (PEPCO), Delmarva Power & Light Co. (DP&L) and Conectiv (CIV) to Negative from Stable. The Rating Outlook for Atlantic City Electric Co. (ACE) was changed to Stable from Positive. Approximately $5.5 billion in debt is affected.

The rating downgrade of PHI reflects continued high parent company debt leverage. Despite improved financial performance during the first quarter of fiscal year 2004, cash flow measures of interest coverage also remain weaker than expected. Debt incurred to finance the 2002 acquisition of CIV has not been retired at the pace that Fitch originally anticipated. For the twelve month period ended March 31, 2004, consolidated adjusted net debt to EBITDA approximated 4.8 times (x) while EBITDA to adjusted interest was 3.45x.

The Negative Rating Outlook of PHI reflects the uncertain prospects for reducing parent debt over the next couple of years. PHI debt reduction during 2004 and 2005 depends upon dividends from its subsidiaries. Challenges at the subsidiaries include the continuation of weak spark spreads at Conectiv Energy Holdings (CEH), higher prices paid by PEPCO on the Mirant Corp. transitional power agreements and potential material cash flow reduction at PEPCO if Mirant ultimately succeeds in rejecting certain power purchase agreement (PPA) related obligations. Additionally, PHI cash flow would be adversely affected if a proposed Congressional bill eliminates tax deductions on PCI's portfolio of cross-border leases.

The rating downgrade did not incorporate tax legislation currently being considered by Congress. The U.S. Senate recently passed a bill that would retroactively affect existing lease transactions and eliminate future tax benefits associated with these assets. However, a similar proposal pending in the House of Representatives would also modify the tax law, but would only apply to lease infrastructure transactions closed after Feb. 11, 2004, and therefore not impact PCI since the company has already announced that it no longer intends to make such investments. While Fitch views the passage of the Senate's version of the bill as unlikely, the uncertainty surrounding the ultimate structure of this legislation could affect future PHI cash flow.

The PEPCO subsidiary remains exposed to default by Mirant on two 'back-to-back' agreements that require Mirant to purchase power from PEPCO at prices significantly above current forward market prices. If Mirant is ultimately successful in rejecting the agreements, PEPCO would first attempt to recoup additional costs as an unsecured creditor in Mirant's bankruptcy proceedings and would seek recovery of any remaining balance from ratepayers. During early May 2004, the legal dispute between PEPCO and Mirant continued as oral arguments regarding the back-to-back agreements were made before the U.S. Fifth Circuit Court of Appeals. Irrespective of the outcome in the appeals court, either party is likely to appeal the case before the U.S. Supreme Court. Fitch views the likelihood of significant recovery of additional costs related to these two obligations in bankruptcy court or from ratepayers as reasonable, though the probable lag of such recovery would pressure cash flows and slow the pace of PHI's debt reduction in the near term.

Fitch recognizes that the company is committed to reducing outstanding debt with available free cash flow. The achievement of significant debt reduction would lead to a positive rating action. Conversely, any developments that could reduce subsidiary dividends to PHI would lower the likelihood of debt reduction and result in a negative rating action.

The Negative Rating Outlooks for PEPCO and DPL reflect Fitch's notching policy on subsidiary and parent rating linkage. A further downgrade of their parent, PHI, would adversely affect the ratings of these regulated subsidiaries. The Negative Rating Outlook for CIV reflects the change in DPL's outlook and the challenging market conditions faced by CEH in the PJM region. ACE's new rating outlook is Stable since ACE's ratings are not currently constrained by the rating of PHI. Fitch notes that the stand-alone credit profile of ACE has improved as a result of debt reduction and tariff increases following the end of the company's rate freeze period in August 2003.

The ratings of the following issues have been affected:

Pepco Holdings, Inc.

-- Senior unsecured debt downgraded to 'BBB' from 'BBB+';

-- Commercial paper affirmed at 'F2';

-- Rating Outlook Negative.

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

-- Senior unsecured debt downgraded to 'BBB' from 'BBB+';

-- Rating Outlook Negative.

Atlantic City Electric Co.

-- Senior secured affirmed at 'A-';

-- Senior unsecured affirmed at 'BBB+';

-- Preferred stock affirmed at 'BBB';

-- Commercial paper affirmed at 'F2';

-- Rating Outlook Stable.

Potomac Electric Power Co.

-- Senior secured affirmed at 'A';

-- Senior unsecured affirmed at 'A-';

-- Preferred stock affirmed at 'BBB+';

-- Commercial paper affirmed at 'F1';

-- Rating Outlook Negative.

Delmarva Power and Light Co.

-- Senior secured affirmed at 'A';

-- Senior unsecured affirmed at 'A-';

-- Preferred stock affirmed at 'BBB+';

-- Commercial paper affirmed at 'F1';

-- Rating Outlook Negative.

Conectiv

-- Senior unsecured affirmed at 'BBB+';

-- Rating Outlook Negative.