Fitch Takes Various Rating Actions on PEPCO Holdings & Units.

NEW YORK -- Fitch Ratings has affirmed the long-term and short-term ratings of PEPCO Holdings, Inc. (PHI, IDR 'BBB') and revised the Rating Outlook to Stable from Negative. At the same time, the Rating Outlook for subsidiaries Potomac Electric Power Co. (PEPCO, IDR 'BBB+') and Delmarva Power & Light Co. (Delmarva, IDR 'BBB+') is revised to Stable from Negative, their long-term ratings are affirmed, and their short-term IDR is lowered to 'F2 from 'F1'. Atlantic City Electric Co. (ACE, IDR 'BBB') long-term and short-term ratings are affirmed and its Rating Outlook remains Stable. Finally, Potomac Capital Investment Corp. (PCI, IDR 'BBB'), ratings are affirmed and its Rating Outlook is revised to Stable from Negative. Complete rating list is below.

The Outlook revisions reflect progress in PHI's efforts to reduce parent debt leverage, the successful negotiation of reasonable rate deferral plans in Maryland and Delaware and favorable litigation settlement with Mirant Corp. (MIR). PHI has paid down over $1 billion in debt and preferred securities over the last several years as well as successfully refinanced a significant amount of higher coupon debt. As a result, adjusted debt to funds from operations (FFO) and FFO to interest equaled 6.4 times (x) and 3.5x, respectively, for the year ended 2006, compared to 7.2x and 3.1x at fiscal year-end 2004. PHI's Stable Outlook assumes that the company will continue to reduce debt and maintain consolidated credit ratios that are in line with the rating category and that regulators in Maryland and other jurisdictions will provide reasonable and timely recovery of costs incurred by PHI's utility subsidiaries. The Outlook revision incorporates recent rate settlement and mitigation plans in Maryland and Delaware that require the deferral of some energy costs resulting in moderate, but manageable financial pressure over the intermediate term.

Upon the expiration of the extended rate freeze period in Maryland at year-end 2006, PEPCO and Delmarva have filed for electric distribution rate increases with PSC decisions expected in June 2007. PEPCO has also filed an electric distribution rate case in Washington, D.C., a decision on which is expected in September 2007. Although rates have been frozen in both states for a number of years, given the recent developments in both Maryland and Delaware, Fitch believes it may be more challenging for PHI's utilities to obtain electric distribution rate increases in those jurisdictions. Notably, the regulatory filings in both Maryland and D.C. include requests for the adoption of rate decoupling mechanisms that would eliminate volumetric exposure to weather conditions and customer conservation. Fitch believes adoption of such mechanisms would help stabilize revenues and solidify the company's credit profile.

Longer term, Fitch believes that if energy costs remain high or increase in subsequent years, there is now greater uncertainty about how quickly Delmarva and PEPCO would be able to recover such costs. Under such a scenario, the resulting cash flow pressure would weaken the financial profile of PHI and its PEPCO and Delmarva subsidiaries, leading to downward rating pressure. The cash flow from operations for both Potomac and Delmarva were already pressured in 2006 by non-recurring items and in part reflect the downgrade of the short-term ratings for both issuers. In addition, the new short-term ratings for both Potomac and Delmarva reflect Fitch's short-term and long-term rating linkage practices (See 'Proposed Revisions to Short-Term Rating Scales' report dated Oct. 24, 2006 available on www.fitchratings.com).

PHI, through its regulated subsidiaries, plans to make growing capital investments to maintain and expand its transmission and distribution system in coming years. In May 2006, PHI announced its intention to build a $1.2 billion 230 mile 500-kv transmission line in the PJM region that runs from Virginia to New Jersey and, if approved, would be constructed over the 2008-2014 time period. Fitch views such transmission investments favorably due to the higher potential returns and explicit capital cost recovery mechanisms that are in place. Fitch expects that PHI will fund the project with a balanced mix of debt and equity to support credit quality. PHI remains involved in a tax dispute with the Internal Revenue Service (IRS) that may potentially affect cash flow. The IRS has challenged the tax benefits PHI has claimed from Potomac Capital Investment's (PCI) portfolio of cross-border energy leases. PHI claimed approximately $287 million in tax benefits from these leases over the 2001-Dec. 31, 2006 period. If the IRS ultimately prevails in this dispute, PHI would be subject to additional taxes, interest and possible penalties. However, this dispute could remain unresolved for an extended period and PHI's financial liquidity is currently adequate to meet such a contingency.

Fitch affirms the following ratings and revises the Rating Outlook to Stable:

PEPCO Holdings, Inc.

--IDR 'BBB';

--Senior unsecured debt 'BBB';

--Commercial paper 'F2'.

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

--IDR 'BBB';

--Senior unsecured debt 'BBB'.

Fitch affirms the following long-term ratings, lowers short-term ratings from 'F1' and revises the Rating Outlook to Stable:

Potomac Electric Power Co.

--IDR 'BBB+';

--Senior secured 'A';

--Senior unsecured 'A-';

--Preferred stock 'BBB+';

--Commercial paper 'F2'.

Delmarva Power and Light Co.

--IDR 'BBB+';

--Senior secured 'A';

--Senior unsecured 'A-';

--Preferred stock 'BBB+';

--Commercial paper 'F2'.

Ratings Affirmed and Outlook Stable

Atlantic City Electric Co.

--IDR 'BBB';

--Senior secured 'A-';

--Senior unsecured 'BBB+';

--Preferred stock 'BBB';

--Commercial paper 'F2'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.