Wall Streets Focus on Credit Quality

1
NASUCA Annual Meeting November 14, 2006

• Wall Streets Focus on Credit Quality
• Impact of Commission Decisions
• on
• Utilities Bond Ratings

Joseph Rigby Senior Vice President CFO Pepco
Holdings, Inc.
2
Safe Harbor Statement
Some of the statements contained in todays
presentation are forward-looking statements
within the meaning of Section 21E of the
Securities Exchange Act of 1934 and are subject
to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. These
statements include all financial projections and
any declarations regarding managements intents,
beliefs or current expectations. In some cases,
you can identify forward-looking statements by
terminology such as may, will, should,
expects, plans, anticipates, believes,
estimates, predicts, potential or
continue or the negative of such terms or other
comparable terminology. Any forward-looking
statements are not guarantees of future
performance, and actual results could differ
materially from those indicated by the
forward-looking statements. Forward-looking
statements involve estimates, assumptions, known
and unknown risks, uncertainties and other
factors that may cause actual results, levels of
activity, performance or achievements to be
materially different from any future results,
levels of activity, performance or achievements
expressed or implied by such forward-looking
statements. Each forward-looking statement speaks
only as of the date of the particular statement,
and we undertake no obligation to publicly update
or revise any forward-looking statement, whether
as a result of new information, future events or
otherwise. A number of factors could cause actual
results or outcomes to differ materially from
those indicated by the forward-looking statements
contained in this presentation. These factors
include, but are not limited to, prevailing
governmental policies and regulatory actions
affecting the energy industry, including with
respect to allowed rates of return, industry and
rate structure, acquisition and disposal of
assets and facilities, operation and construction
of plant facilities, recovery of purchased power
expenses, and present or prospective wholesale
and retail competition changes in and compliance
with environmental and safety laws and policies
weather conditions population growth rates and
demographic patterns competition for retail and
wholesale customers general economic conditions,
including potential negative impacts resulting
from an economic downturn growth in demand,
sales and capacity to fulfill demand changes in
tax rates or policies or in rates of inflation
potential changes in accounting standards or
practices changes in project costs
unanticipated changes in operating expenses and
capital expenditures the ability to obtain
funding in the capital markets on favorable
terms restrictions imposed by Federal and/or
state regulatory commissions legal and
administrative proceedings (whether civil or
criminal) and settlements that influence our
business and profitability pace of entry into
new markets volatility in market demand and
prices for energy, capacity and fuel interest
rate fluctuations and credit market concerns and
effects of geopolitical events, including the
threat of domestic terrorism. Readers are
referred to the most recent reports filed with
the Securities and Exchange Commission.
3
PHI Overview Regulated TD Focused
Regulated Electric Gas Delivery Business
8.5B LTM Revenues 13.9B Total Assets 4.6B
Market Cap 1.8 Million Electric Customers 120,000
Gas Customers
67 of Operating Income
CompetitiveEnergy/ Other
Regulated Electric Gas Delivery Business
PHI Investments
33 of Operating Income
Note
Financial and customer data as of September 30,
2006. Operating Income percentage calculations
are for the twelve months ended September 30,
2006, net of special items. See appendix for
details.
4
PHI Strategy - Summary
PHIs corporate strategy is to remain a regional
diversified energy delivery utility and
competitive services company focused on value
creation and operational excellence

• Power Delivery Utility Operations
• ? Operate with excellence
• ? Achieve constructive regulatory outcomes
• ? Invest in infrastructure
• Conectiv Energy
• ? Optimize assets and capture market
  opportunities
• ? Adjust hedging strategy as conditions change
• ? Continue to evaluate asset purchase
  opportunities
• Pepco Energy Services
• ? Expand into additional attractive markets

Note See Safe Harbor Statement at the beginning
of todays presentation.
5
Re-entering the Rate Case Arena

• Until recently, we had been out of the rate case
  arena for about a decade

• We ramped up our regulatory staff
• We have a detailed master project plan in place
• By year-end, we plan to have four active cases
  underway

6
The Challenge of Todays Regulatory Environment

• Higher Fuel Costs
• Removal of Rate Caps

Significant Increase in Standard Offer Service
Rates

• Customer Concerns
• Intense Media Coverage
• Election Year

Adverse Political Reaction

• Deferral Plans in MD and DE
• Disallowance in VA
• Quasi Re-Regulation
• (IRP Process in DE)
• Attempt to remove MD PSC

Regulatory Uncertainty
7
The Markets Reaction

• On the credit side
• Both Moodys and Standard Poors have recently
• downgraded PHI and several of its subsidiaries
  due to
• heightened regulatory risk
• Moodys Report dated July 11, 2006
• The downgrades reflect
• the significant decline in the supportiveness of
  the regulatory environments for electric
  utilities in Maryland and Delaware
• expectations that rate relief will be less
  constructive in the currently contentious
  environment even if the attempt to replace the
  MD commission does not succeed.

8
The Markets Reaction

• On the credit side (continued)
• Standard Poors Report dated August 7, 2006
• this credit ratio improvement depends on
  supportive
• regulation through rate relief, which in
  Standard Poors
• view could be at risk given the heightened
  regulatory
• uncertainty in multiple jurisdictions.
• The utility business strengths are offset by
  an
• increasingly challenging regulatory environment
  in some of
• its jurisdictions partly due to rising
  commodity costs.

9
Activities Impacted by Credit Downgrade

• Access to commercial paper market for PHI
• Short term rating of A2 (SP) / P3 (Moodys)
  makes PHI a tier 3 issuer
• Many investors are prohibited from investing in
  low rated commercial paper
• On days with limited demand or extra volatility,
  Tier 3-rated issuers may not have access to the
  market
• Short term borrowing cost
• Cost to issue commercial paper is higher by
  10-25bps, depending on market conditions
• For every 100 million outstanding, the annual
  cost increases 100,000-250,000
• Credit facility fees
• Pricing grid based on ratings by 3 agencies
• Annual facility and letter of credit fees
  increase 200,000 - 300,000

10
Activities Impacted by Credit Downgrade

• Long term borrowing cost
• Credit spreads for new issues widen
• Based on current market conditions and a new 500
  million debt issuance, the lower rating adds
  approximately 400,000- 500,000 to annual
  interest expense
• Unsecured credit limits assigned by
  counterparties
• Collateral posting with counterparties based on
  credit rating
• A one-notch downgrade of the credit rating by one
  agency triggered approximately 35 million in
  cash collateral to be posted. A one-notch
  downgrade by another agency triggered 25 million
  in additional cash collateral.
• A downgrade to below investment grade would
  trigger a total of approximately 437 million in
  additional collateral
• Collateral requirements in new contracts going
  forward will be higher due to lower unsecured
  credit limit assigned

11
Why Should Regulators and Customers Care?

• Bond ratings are important
• used by investors to determine the relative
  quality of a debt investment
• some investors are prohibited from investing in
  the lower rated entities
• determines the cost of new debt - the risk
  premium investors demand rises as the rating
  decreases and
• has bearing on stock price and cost of equity
• A utility with strong credit ratings can share
  the benefit of attractive interest rate levels
  with customers through lower rates.
• Generally, the higher the rating of the bond, the
  better the access to capital markets, the more
  favorable the terms and the lower the interest to
  be paid.

12
Why Should Regulators and Customers Care?

• Utilities have an ongoing need for substantial
  amounts of investor capital
• infrastructure construction
• maintenance of the system for continuing
  reliability
• securing of fuel and/or power supply on either a
  planned or unscheduled basis.
• The cost of financing matters
• Interest on debt is the companys largest
  expense, after cost of goods sold and operating
  and maintaining the system
• In 2003 and 2004, for every dollar of revenue the
  company took in, 5 cents was paid out in interest
  expense. Due to the companys ability to
  refinance on favorable terms, we reduced interest
  expense to 4 cents for every dollar of revenue.
• Reduction in interest cost offsets increases in
  operating costs and reduces the future amount of
  revenue the company must recover from its
  customers.

13
What Can Regulators Do?

• Recognize that regulation is a key factor in
  assessing the credit profile of a utility
• Understand the market dynamics and the importance
  of a regulators role in meeting market
  expectations
• Before major investors invest substantial sums of
  money, they want comfort that regulators
  understand the economic, financial and
  operational risks of the industry and that their
  decision-making will be fair and have a
  significant degree of predictability.
• Understand that the level of ROE authorized by
  regulators is important to debt investors
• Equity in a utility capital structure provides a
  company the capacity to tolerate normal
  operational business risks, and provides a
  cushion to lenders and bondholders (fixed-income
  investors).
• Fixed-income investors look to the earnings of
  shareholders as an additional margin available
  for the payment of interest and principal under
  adverse business circumstances.
• Seek to ensure that the financial health of the
  states utilities remain sufficient for them to
  provide reliable service to all consumers
• Take timely action and minimize uncertainties /
  surprises

14
Dealing with the Challenge

• Stay focused on providing reliable customer
  service
• Invest to maintain the system
• Maintain an on-going dialogue with key
  stakeholders
• Trust in the regulatory compact