Fitch Ratings Affirms Potomac Capital At 'BBB+/F2'; Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 15, 2002

Fitch Ratings affirms Potomac Capital Investment Corp.'s (PCI) 'BBB+' senior debt and 'F2' commercial paper ratings. Approximately $815 million of debt securities are covered by Fitch's actions. The Rating Outlook is Stable.

The affirmations are made in advance of Potomac Electric Power Co.'s (PEPCO) acquisition of Conectiv for $2.2 billion in cash and stock. PEPCO is PCI's current parent and the relationship between the two companies is governed by a keepwell agreement. Following the completion of the Conectiv acquisition, PCI will become a direct subsidiary of PEPCO Holdings, Inc. (PEPCOH), a new holding company formed to house the PEPCO and Conectiv businesses. PEPCOH. intends to enter into an unconditional guarantee for all of PCI's new debt issuances. Fitch rates PEPCOH 'BBB+' for senior debt and 'F2' for commercial paper.

Commercial paper will be issued at the PEPCOH level for the entire enterprise. This will allow for improved borrowing efficiency as individual business subsidiaries will buy and sell short-term debt amongst themselves with only PEPCOH issuing commercial paper to investors. Once all its outstanding commercial paper is repaid, PCI's commercial paper rating will be withdrawn.

PCI's ratings reflect its ownership by a large multi-state utility holding company, which intends to guarantees its future debt issuances, well-defined operating strategy, trends in financial leverage since 1995, and structural support arising from bank debt covenants. Rating concerns center on PCI's willingness to underwrite and retain large individual investments relative to book equity, the residual and tax risks arising from certain leasing activities, and company's relative size and importance to PEPCOH going forward.

PCI manages a diversified financial portfolio focused on the energy sector, including commercial leasing, and an operating services company. The company is an unregulated, indirect wholly owned subsidiary of PEPCO and had total balance sheet assets of $1.3 billion at Dec. 31, 2001. PCI is currently responsible for PEPCO's financial investments, telecommunications services, and utility industry services businesses. A medium term note covenant, expiring in November 2003, requires a minimum net worth and maintenance of an investment-grade securities portfolio of $150 million. To the extent the securities portfolio exceeded the required $150 million covenant, the securities portfolio has historically provided management available liquidity in order to meet maturing commercial paper borrowings in the event maturing debt could not be extended.

PCI's operating strategy over the past six years has increasingly focused on investing in energy and telecommunication assets and away from other collateral types such as aircraft. Fitch views this strategy favorably as the company has developed market expertise in business segments that are less prone to commoditization and allowed PCI to lever off its parent's industry knowledge. Additionally, as a subsidiary of a large utility, PCI does not face the same level of current earnings pressure that publicly owned commercial leasing companies encounter. As part of PEPCOH's structure, it is intended that the telecommunication assets, principally the investment in Starpower, will be spun out of PCI so it will be a first tier subsidiary of PEPCOH.

In 2001, PEPCO took an after-tax charge of $42.5 million in connection with the writedown of certain PCI investments. Investments revalued in this non-cash charge include a $6.5 million after-tax writedown of a $10 million preferred stock investment in a subsidiary of Enron Corp. and a $36 million after-tax writedown to the PCI's aircraft leasing portfolio. Following this action, the carrying value of the aircraft portfolio will approximate $27.3 million.

With the evolution in operating strategy, PCI's financial leverage, defined as debt divided by tangible equity, has trended downward from 7.55 times (x) at Dec. 31, 1995 to 2.26x at Dec. 31, 2001. Leverage declined sharply in 2000 due to a $150 million equity injection made by PEPCO. Prior to the fourth quarter of 2001, leverage continued to decline. However, the combination of a $40 million loss in the fourth quarter and an increase in balance sheet footings pushed leverage up from 1.70x at Sept. 30, 2001. Meaningful increases in PCI's current leverage are not expected, as this would be unfavorable to the net income of PCI.