Fitch Downgrades Potomac Electric; Affirms PEPCO Holdings, Delmarva Power, & Atlantic Electric

  Fitch Downgrades Potomac Electric; Affirms PEPCO Holdings, Delmarva Power, &
  Atlantic Electric

Business Wire

NEW YORK -- July 18, 2013

Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Potomac
Electric Power Co. (Pepco) to 'BBB' from 'BBB+' and revised the Rating Outlook
to Stable from Negative.

Concurrently, Fitch affirmed the 'BBB' IDRs of Pepco Holdings, Inc. (PHI) and
Atlantic City Electric Co, (ACE) and the 'BBB+' IDR of Delmarva Power and
Light Co. (DPL).

Fitch also downgraded the short-term IDR rating of PHI to 'F3' from 'F2' and
affirmed the short-term ratings of Pepco, DPL and ACE at 'F2'.

A full list of the rating actions appears at the end of this release.

Key Rating Drivers

Regulated Utility Earnings Contribution: PHI's ratings are supported by the
cash flows generated by its three regulated transmission and distribution
utility subsidiaries, Pepco, DPL and ACE, which are expected to provide
approximately 98% of consolidated operating income over the next several
years. PHI's non-regulated subsidiary, Pepco Energy Services (PES), which
provides energy services to government and other institutional customers and
takes no commodity risk, accounts for the remaining earnings.

Predictable Cash Flows: The three operating utilities have minimal commodity
price exposure and only about one-third of utility revenue is subject to
volumetric risk due to decoupling mechanisms in both Maryland and the District
of Columbia.

Significant Capital Investment: PHI's utilities are in the midst of a
significant capital expenditure plan of approximately $5.7 billion over
2013-2017 that will require ongoing rate support. A large portion of the
expenditures are to address reliability issues that have been a point of
contention with regulators, particularly for Pepco in Maryland. The ratings
assume a balanced mix of debt and equity will be used to fund the
expenditures.

Persistent Regulatory Lag: Persistent regulatory lag at the three utility
subsidiaries is a primary credit concern. The lag, which primarily results
from the reliance on historical test years with limited forward adjustments,
restricts the company from earning its allowed return on equity (ROE) and
adversely affects credit quality measures. The lag is particularly troublesome
during this period of high capex. To combat the regulatory lag, management
plans to file annual rate cases while also pursuing various adjustment
mechanisms to accelerate capital and cost recovery.

Cross Border Lease Portfolio: Earlier this year PHI made a $242 million
deposit with the IRS that should resolve its tax dispute regarding its
cross-border lease portfolio. The deposit is well below the total tax
exposure, previously estimated to be approximately $750 million, due to the
application of accumulated tax deductions unrelated to the lease portfolio,
the carry back or forward of net operating losses, settled tax positions and
deposits with the IRS. PHI is in the process of liquidating the lease
portfolio which will provide a significant influx of cash. Year to date, PHI
liquidated two lease transactions with total proceeds of $373 million. The
remaining leases are expected to be terminated later this year. A portion of
the lease liquidation proceeds will be allocated to the utilities, which
accounted for the majority of the tax offsets.

Rate Increases: During the second half of 2012 PHI's three utility's
implemented five rate increases aggregating $104 million or roughly 43% of the
$242 million requested. Additional rate increases of $53.4 million were
implemented in 2013 (about 40% of requested amounts) and $129.1 million of
rate requests are pending.

Credit Metrics: Consolidated credit metrics are generally comparable to PHI's
peer group of similarly rated parent holding companies, although leverage is
moderately high, and should improve due to actual and pending rate increases
and application of a portion of the lease liquidation proceeds to debt
reduction. Going forward Fitch anticipates FFO to debt will range between 16%
to 17% and Debt/EBITDA to be about 4.5x. FFO/interest and EBITDA/interest are
forecasted to be in excess of 4.0x. Improving credit metrics reflect actual
and pending rate requests and the reduction in short-term debt related to the
settlement of a forward equity contract for $312 million earlier this year and
the use of lease liquidation proceeds.

Short-term Ratings: The lower short-term rating for PHI is consistent with
Fitch criteria. Non-utility corporate issuers rated 'BBB' with negative free
cash flow are assigned F3 ratings.

Rating Sensitivities

The regulatory treatment of utility capital investments is the primary driver
of credit quality and ratings.

An IRS finding of additional taxes, interest or penalties related to the cross
border lease portfolio would offset some of the expected improvement in credit
quality measures.

PEPCO

Key Rating Drivers

Ratings Downgrade: The downgrade reflects leverage measures that are weak for
the rating category, a challenging regulatory environment in Maryland and a
large capital investment program and high level of O&M spending to address
reliability issues.

Rate Decision: A July 2013 rate decision was disappointing, albeit moderately
better than the previous rate case decided in July 2012. The Maryland Public
Service Commission (PSC) authorized Pepco a $27.9 million rate increase based
on a 9.36% return on equity (ROE), which is among the lowest in the industry,
and a 48.9% equity ratio. The rate increase equates to 46% of the company's
$60.8 million rate request. Particularly troubling for fixed income investors
is the PSC's continued reluctance to permit forward adjustments to address
regulatory lag which will prevent Pepco from earning its allowed ROE. While
Fitch expects management to offset a portion of the reduced revenue with cost
reductions, the company will be hard pressed to reduce its planned capital
investments in light of past reliability issues.

Low Business Risk: Pepco's regulated electric transmission and distribution
operations have minimal commodity, volumetric and environmental exposure.
Moreover, the significant presence of state and federal government customers
tends to reduce economic volatility in the region. Also, both Maryland and DC
have permitted revenue decoupling, which eliminates fluctuations due to
weather and changes in usage patterns. However, the positive impact of
decoupling is mitigated by regulatory lag and authorized ROEs that are well
below the industry average.

Significant Capital Investment: Pepco is in the midst of a significant capital
expenditure plan of approximately $3 billion over 2013-2017. A large portion
of the expenditures are to address reliability issues that have been a point
of contention with Maryland regulators. The capital plan will require annual
rate increases in both Maryland and the District of Columbia to maintain
credit quality.

Credit Metrics: Going forward Fitch anticipates FFO to debt to range between
17% to 18% and debt/EBITDA about 4.25x. FFO/interest and EBITDA/interest are
expected to be in the 4.5x - 5.0x range.

Rating Sensitivities

The outcome of a pending rate case in D.C. will be important to maintaining
credit quality. The current ratings assume a constructive rate decision in D.C

The extent of cost cutting measures to offset the recent unfavorable rate
decision in Maryland will also be an important driver of credit quality.

The amount of lease liquidation proceeds allocated to Pepco and used to reduce
or eliminate future debt financings will also affect credit quality and
ratings.

Delmarva Power & Light

Rating Drivers

Low Business Risk: DPL's ratings and Stable Outlook are supported by the
predictable cash flows generated from its regulated electric transmission and
distribution and gas distribution operations. DPL bears no commodity price
risks and has decoupling in Maryland. About two-thirds of electricity sales
are in Delaware, which has a relatively constructive regulatory environment.
Rate cases are pending in both Maryland and Delaware with decisions in both
states expected in 2013 Q4.

Solid Credit Metrics: Credit metrics are largely in line with the rating
category, although leverage is somewhat high. Going forward Fitch expects
FFO/debt to range between 19% to 21% and debt/EBITDA to range between 3.5x and
4.0x. FFO/interest and EBITDA/interest are expected to approximate 4.5x and
5.0x, respectively.

Significant capital investment: DPL is also in the midst of an aggressive
capital investment plan that calls for approximately $1.6 billion to be spent
over 2013-2017 and will require on-going rate support.

Rating Sensitivities

No rating actions are anticipated, but credit quality will be affected by:

The outcome of three pending rate cases in Delaware (electric and gas) and
Maryland aggregating $77 million; each of the rate cases will be decided
before year-end.

The amount of lease liquidation proceeds allocated to DPL and used to reduce
or eliminate future debt financings will also affect credit quality.

Atlantic City Electric Company

Low Business Risk: ACE's ratings and Stable Outlook are supported by low
business risk and predictable cash flows generated by its regulated electric
transmission and distribution operations. ACE bears no commodity risk.
However, ACE does face timing mismatch in recovering the power costs
associated with three power purchase contracts with non-utility generators
(NUG).

Credit Metrics: Credit metrics are supportive of the rating category. Going
forward Fitch anticipates FFO/debt to range between 14% and 18% and
Debt/EBITDA to approximate 4.0x. FFO/interest is expected to average over 4.0x
and EBITDA/interest in excess of 4.5x.

Manageable Capital Budget: ACE's ratings reflect a manageable capital
expenditure plan and moderate external financing needs over Fitch's forecast
period. ACE has not been able to get approvals from BPU for decoupling and
smart grid investments, unlike its sister utilities.

Rate Increase: On June 21, 2013, the BPU approved a settlement agreement in
ACE's pending rate case. The settlement authorized a $25.5 million rate
increase premised on a 9.75% ROE or about 36% of the company's rate request.
The settlement included full recovery of approximately $70 million of storm
restoration costs related to the June 2012 Derecho and Hurricane Sandy in
October 2012. This was ACE's second rate increase in approximately 8 months.
In light of the disappointing rate order, ACE intends to reduce capital
expenditures by a total of $150 million through 2015.

Rating Sensitivities

No rating changes are expected at this time however credit quality will be
affected by:

The amount of lease liquidation proceeds allocated to ACE and used to reduce
or eliminate future debt financings will also affect credit quality measures.

The continued support of capital investments and recovery of commodity costs
are important rating factors.

Fitch affirms the following ratings with a Stable Outlook:

Pepco Holdings, Inc.
--IDR at 'BBB';
--Senior Unsecured Notes at 'BBB'.

Delmarva Power & Light
--IDR at 'BBB+';
--Secured Debt at 'A';
--Senior Unsecured Notes at 'A-';
--Short-term IDR/Commercial paper at 'F2'.

Atlantic City Electric Company
--IDR at 'BBB';
--Secured Debt at 'A-';
--Senior Unsecured Notes at 'BBB+';
--Short-term IDR/Commercial paper at 'F2'.

Potomac Electric Power Company
--Short-term IDR/Commercial paper at 'F2'.

Fitch downgrades the following ratings:

Potomac Electric Power Company
--IDR to 'BBB' from 'BBB+';
--Secured Debt to 'A-' from 'A';
--Senior Unsecured Notes to 'BBB+' from 'A-';

Pepco Holdings, Inc.
--Short-term IDR/Commercial paper to 'F3' from 'F2'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2012);
--'Parent and Subsidiary rating Linkage' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
2011);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
analysis' (Dec. 13, 2012);
--'Short-term Ratings Criteria for Nonfinancial Corporates' (Aug. 9, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553

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Contact:

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