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Rating Action:

Moody's Changes Atlantic City Electric Outlook to Negative from Stable

03 Jul 2008
Moody's Changes Atlantic City Electric Outlook to Negative from Stable

Approximately $425 Million in Debt Affected

New York, July 03, 2008 --

Moody's Investors Service today changed the rating outlook of Atlantic City Electric Company (ACE) to negative from stable and affirmed the company's debt ratings including its A3 senior secured and Baa1 senior unsecured long-term ratings and Prime-2 commercial paper rating.

The change in rating outlook to negative from stable reflects Moody's concern that the future financial performance of the company over the medium term will likely be lower than previously expected. We expect the company to face significant challenges in maintaining its key credit metrics at historic levels due to continued increases in operating expenses coupled with regulatory lag as the company has not filed a rate case in several years along with a stepped-up capital spending program that will undoubtedly lead to additional external debt financings to meet higher levels of negative free cash flow. The company's cash flows will also be pressured over the next several years as it begins to amortize into its customers' rates previously retained over-recoveries associated with its Non-Utility Generation Charge (NGC). The refunds are part of the May 1, 2008 settlement reached between ACE and the New Jersey Board of Public Utilities (NJBPU) which closes the petition filed by ACE with the commission on June 1, 2007.

Over the next several years, ACE's annual average utility-related capital expenditures will be approximately $170 million, which will leave the company in a significantly negative free cash flow position. We expect the company will use a mix of debt and capital contributed from its parent (Pepco Holdings) to fund the expected cash flow shortfalls during the construction cycle, with a strategic focus on maintaining its capitalization ratios as proscribed by the NJBPU. Although we previously expected that ACE could maintain its credit metrics including CFO pre-working capital charges to interest of 4x and CFO pre-working capital charges to debt in the mid-to-high teens, we now take a view that sustaining such levels over the next 12 months appears less likely given the recent decision that ACE must credit back to consumers over-recoveries through 2011.

The ratings for ACE could be subject to downgrade in the medium to intermediate term if there is a sustainable weakening of the credit metrics, material construction cost overruns associated with its capital program, higher than anticipated O&M expenses or if there are disallowances for putting capital projects into rate base by the regulators.

Headquartered in Atlantic City, New Jersey, Atlantic City Electric Company (ACE) is a rate regulated public utility that provides the transmission and distribution of electric power to approximately 544,000 customers within its 2,700 square mile service territory in southern New Jersey. ACE is an indirectly wholly owned subsidiary of Pepco Holdings, Inc.

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Edward Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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