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Executives

Donna Kinzel – Director Investor Relations

Dennis R. Wraase – Chairman of the Board & Chief Executive Officer

Paul H. Barry – Chief Financial Officer & Senior Vice President

Joseph M. Rigby – President & Chief Operating Officer

David M. Velazquez – President & Chief Executive Officer Conectiv Energy Holding Corporation

John U. Huffman – President & Chief Operating Officer of Pepco Energy Services, Inc.

Analysts

Daniel Eggers – Credit Suisse

Paul Patterson – Glenrock Associates

[Dan Jenkins – State of Investment]

Mark Segal – Canaccord Adams

Pepco Holdings, Inc. (POM) Q3 2008 Earnings Call November 4, 2008 9:30 AM ET

Operator

Welcome to the third quarter 2008 Pepco Holdings Incorporated earnings conference call. My name is [Nikita] and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce Donna Kinzel, Director Investor Relations.

Donna Kinzel

Welcome to the Pepco Holdings third quarter 2008 earnings conference call. The primary speakers on today’s call are Dennis Wraase, Chairman and Chief Executive Officer and Paul Barry, Senior Vice President and Chief Financial Officer. Also available to answer your questions are Joe Rigby, President and Chief Operating Officer, Dave Velazquez, President and Chief Executive Officer Conectiv Energy and John Huffman, President and Chief Operating Officer of Pepco Energy Services.

Before Dennis begins, let me remind you that some of the comments made during today’s conference call may be considered forward-looking statements. As such, they should be taken in the context of the risk and uncertainties discussed in the Safe Harbor disclosures contained in our Securities & Exchange Commission filings.

Also please note that today’s call will include a discussion of our results excluding certain items that we feel are not representative of the company’s ongoing business operations. These special items in our financial impact are described in our earnings release dated November 3, 2008. The earnings release can be found at www.PepcoHoldings.com/investors.

Dennis R. Wraase

I appreciate your participation on our call today and look forward to speaking with many of you in person at the EEI financial conference next week. Our earnings this quarter were negatively impacted by lower sales in our power delivery businesses caused by both milder weather and lower customer usage. While we experienced modest customer growth in our service territory, weather adjusted kilowatt hour sales decreased by 2%.

Fortunately, a portion of the impact of lower sales was offset by the revenue decoupling mechanism that we have in place in Maryland. Looking forward we expect the recessionary pressures on the economy to continue to impact demand and customer growth. Pepco Energy Services earnings were lower due to mark-to-market losses related to congestion and power hedges.

Conectiv Energy reported a strong quarter despite a 22% decline in run time at the plants caused primarily by milder weather. Gross margins was up by 24% due to higher capacity prices and fuel hedges. Consolidated earnings for the quarter were $119 million compared to $168 million in the third quarter of 2007. Excluding gains recognized in the third quarter of last year for the Mirant bankruptcy damage claim settlement and the Maryland income tax settlement, earnings for the third quarter of 2007 would have been $130 million.

Paul will discuss the financial results in detail but first I’d like to address a few items of interest. Over the past couple of months we have experienced unprecedented volatility in the credit and capital markets. As a results a major focus for our industry has become the access to adequate capital resources and liquidity. Pepco Holdings and its utility subsidiaries maintain a $1.5 billion credit facility to provide for their respective short term liquidity needs. 17 banks participate in the facility with no one bank having more than 8.5% of the total commitments.

This facility is in effect until May, 2012. At the end of the quarter Pepco Holdings and its subsidiaries had $787 million of cash and credit capacity in aggregate to meet liquidity requirements. We are currently in the process of adding credit capacity to provide additional liquidity given the uncertain financial markets. Paul will give you the details of this effort later on the call. And, as we have discussed previously, we also intend to access the equity and debt markets to meet our longer term financing needs in connection with our construction program.

Obviously, in times such as these we recognize the need to be flexible with regard to spending plans. We have reviewed our 2009 construction plans and have identified projects totaling 20% to 25% of spending that we can defer while still meeting reliability standards and regulatory commitments. Now, for an update on our regulatory initiatives; on August 18th we submitted an incentive filing with the FERC in connection with our mid Atlantic power pathway or MAP project.

The filing requested a 150 basis point return on equity adder given the large regional benefit upgrades and the technical complexity of the project. We also requested the construction work in progress be included in rate base and that 100% of prudently incurred costs be recovered in case of project cancellation for reasons beyond our control. I’m pleased to say that on October 31st the FERC issued an order unanimously approving the requested incentives. The incentive rate treatment will be implemented through a formula rate process and the project will earn a 12.8% return on equity.

The Commission stated that the MAP project will improve import capabilities, reduce transmission congestion costs and improve reliability in the mid Atlantic region. The commission also recognized that the incentives will promote these goals and are an important component of ensuring the construction of the project. Also in connection with the MAP project, the PJM staff continues to support a direct current crossing of the Chesapeake Bay. As we have previously mentioned, the estimated incremental cost for a direct current crossing will be approximately $400 million.

If adopted, the direct current crossing will bring the total project cost up to about $1.4 billion. The use of direct current provides system benefits, operating flexibility and is environmentally friendly. The PJM board is expected to address this issue by the end of the year. Now, for our blueprint initiatives; on September 16th the Delaware Public Service Commission approved the application of advanced metering infrastructure or AMI technology across the distribution system. A regulatory asset will be created to get recovery of and a return on AMI related cost between rate cases.

Our blueprint initiatives continues to move forward in our other jurisdictions but at a much slower pace than previously expected. We will not proceed with the deployment of our blueprint programs in these jurisdictions until authorization for full and timely cost recovery is received. The Delaware Commission also approved the adoption of a modified fixed variable rate design. This design decouples distribution revenue from throughput by recovering fixed costs through a fixed charge and a variable cost through a volume metric charge.

This revenue decoupling rate structure will be implemented at the time of Delmarva Power’s net rate case proceedings. With the addition of decoupling in Delaware, Pepco Holdings will have about 57% of its power delivery revenue decoupled from sales. Now, I’ll turn to our competitive businesses. The third quarter was a good quarter for Conectiv Energy. Based on our year-to-date results and our projections for the remainder of the year we continue to expect Conectiv Energy to achieve annual gross margin results in the upper portion of our 2008 forecasted range.

Construction of Conectiv Energy’s new power plants at the Delta and Cumberland sights continue to proceed on schedule and within budget. At Cumberland the combustion turbine was placed on its foundation last week. Approximately 76% of the construction expenditures for this project were spent by the end of the third quarter. At Pepco Energy services, retail electric sales rose modestly quarter-over-quarter while earnings were negatively impacted by mark-to-market losses, electric load continues to steadily increase.

At the end of the third quarter, Pepco Energy services served about 4,500 megawatts of load, up 6% over the last quarter. At this point let me turn it over to Paul Barry.

Paul H. Barry

I hope you’ve had a chance to review our earnings release. I’ll review our results and provide some additional detail. We’ll than open the call to your questions. Consolidated earnings for the third quarter were $119 million or $0.59 per share compared to $168 million or $0.87 per share for the third quarter last year. There were no special items in the 2008 quarter.

Excluding the special items in the 2007 quarter, earnings would have been $130 million or $0.68 per share. Year-to-date consolidated earnings were $233 million or $1.16 per share compared to $276 million or $1.43 per share for the first nine months of 2007. Excluding the adjustment to the equity value of the cross border energy lease investments made earlier this year, earnings would have been $326 million or $1.62 per share. Excluding the special items in the 2007 period, earnings would have been $239 million or $1.24 per share.

Power delivery earned $0.38 per share in the third quarter compared to $0.44 per share in the third quarter of 2007 excluding special items. The biggest driver of the decrease in earnings quarter-over-quarter was lower kilowatt hour sales partially driven by the mild weather but to a greater extent caused by lower non-weather related customer usage. As Dennis mentioned, while we had modest customer growth weather adjusted sales were down 2%.

We expect continued pressure on sales and customer growth given the weakened state of the economy. Cooling degree days were down 4% as compared to the third quarter of last year. The impact of the weather for the quarter versus normal weather is an earnings increase of $0.01 per share. The sales declined due to mild weather, lower customer usage and other factors such as rate mix, lowered earnings by [$0.06] quarter-over-quarter. Higher operation and maintenance expenses in the 2008 quarter lowered earnings by $0.02 per share.

These higher expenses were primarily due to bad debt expense and employee related expenses. Despite the inflationary pressure we’ve experienced over the course of the year we expect O&M expenses to be only modestly above the projected presented at our April 4th analyst conference. The partially offsetting factor is the revenue impact of Maryland and District of Columbia rate case decision which increased earnings by $0.04 per share. About half of this increase was due to the higher rates in the District of Columbia with the remaining $0.02 due to the Maryland rate orders including the impact of the decoupling adjustment.

Year-to-date power delivery earnings were $0.99 per share in the 2008 compared to $0.86 per share for the nine months ended September, 2007 excluding special items. The biggest driver of the increase in earnings period-over-period was the impact of the Maryland and the District of Columbia rate case decisions which increased earnings by $0.13 per share. Other positive factors were the impact of higher transmission rates which increased earnings by $0.06 per share and income tax adjustments primarily related to Fin 48 interest which increased earnings by $0.08 per share.

Partially offsetting these increases were higher operation and maintenance expenses which lowered earnings by $0.07 per share. Lower kilowatt hours sales primarily caused by mild weather and lower customer usage also caused a decline in earnings of $0.07 per share. The weather year-to-date versus normal weather had no impact on earnings. Conectiv Energy’s results for the quarter were $0.24 per share as compared to $0.19 per share for the 2007 quarter.

Gross margins increased $25 million quarter-over-quarter. About $22 million of this increase is related to fuel hedges net of the impact of lower default electricity supply sales. Higher [PCAM] capacity prices net of capacity hedges drove approximately $13 million of the increase. About $11 million of the increase is from higher energy marketing gross margins and about $6 million of the increase is due to mark-to-market gains related to economic coal hedges. Partially offsetting these factors were our $16 million reduction in energy margins due to lower generation output and lower sparks spreads and a $12 million decrease caused by lower emission credit sales.

Conectiv Energy results for the nine months ended September, 2008 were $0.59 per share as compared to $0.30 per share for the 2007 period. The higher earnings are primarily due to opportunities resulting from its generating units operating flexibility and due fuel capability and its firm natural gas transportation and storage positions coupled with increasing fuel prices and volatility. Higher capacity prices, mark-to-market gains related to economic fuel and power hedges and higher energy marketing margins also contributed to the increase in earnings.

Taking in to consideration results through September, Conectiv Energy expects to achieve annual total gross margins in the upper portion of our 2008 forecasted range of $380 million to $435 million. In addition, we are confirming our forecasted growth margin ranges of $400 million to $475 million for 2009 and $460 million to $550 million for 2010. Pepco Energy services results for the quarter were $0.01 per share compared to $0.05 per share for the third quarter of 2007.

The decrease was primarily due to a $7 million after tax mark-to-market loss related to economic hedges of PGM congestion risk and power. Lower generation output also contributed to the decline in earnings quarter-over-quarter. Year-to-date earnings were $0.14 per share as compared to $0.12 per share for the 2007 period. The increase was driven by higher earnings from the retail energy supply business due mainly to more favorable congestion costs.

As Dennis mentioned we are in the process of adding credit capacity to provide additional liquidity. Currently we have well over $300 million of written credit commitments for our new bank credit facility. Also, as we previously discussed, we expect to access the capital markets to meet our longer term financing needs in connection with our construction program. We are actively exploring a broad range of financing alternatives in both the debt and equity markets. This includes pursuing regulatory approval for the issuance of securities by the utilities.

Atlantic City Electric as recently received authorization from New Jersey to issue $250 million of first mortgage bonds. Both Pepco and Delmarva Power each have filings pending at the respective commissions requesting authorization for the issuance of $200 million of first mortgage bonds. In closing, the third quarter was challenged by a weakened economy, mild weather and volatile financial markets. However, the fundamentals of our company remain strong. We continue to demonstrate effectiveness in the regulatory arena.

We have a construction program that is heavily focused on transmission and distribution reliability projects and we continue to focus on executing our business plan. With that we’d like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Daniel Eggers – Credit Suisse.

Daniel Eggers – Credit Suisse

On the cap ex, the 20% to 25% room to cut in ’09, how much of this do you guys thing is going to be permanently capital versus capital that gets pushed out in to ’10 and beyond I guess is question one?

Dennis R. Wraase

I tell you there’s a small amount that would be permanent but most of it, as you would expect in the distribution business related to lower load growth where we’ll be able to push out substations and those kinds of reliability projects to future years because the load won’t be there when we had originally planned. So, a lot of it will be deferred in to future years.

Daniel Eggers – Credit Suisse

Then I guess with the Delta and Cumberland plants in process how are you guys thinking about financing those? If we look out in the market first mortgage bonds have been placeable, we haven’t seen a lot, are you guys looking at Holding company debt or Conectiv debt or is this going to have to be more of an equity funded type of investment right now.

Paul H. Barry

The way we look at that Dan is really those projects are self funded from cash flow from Conectiv Energy over the course of their construction period.

Daniel Eggers – Credit Suisse

Those are all cash funded effectively?

Paul H. Barry

Correct.

Daniel Eggers – Credit Suisse

Turning kind of the tone to Pepco Energy Services we’ve seen kind of two profile players have material problems in the third quarter. How are you guys looking at that business? You’re seeing margin pressure and you’re seeing liquidity pressure in that business. What is the outlook and where do you guys see the comfort level with your size of balance sheet to support that business.

Dennis R. Wraase

First off I’d say I haven’t seen or I don’t think John would say that we’ve seen the contraction of the margins. Obviously we are building in to any of our new business an appropriate cost to deal with the liquidity and the kinds of credit pressures that we have seen however, I’d like to differentiate ourselves from having read your report which came out this morning from RRIs for example where we have continued to run this on a profitable basis. I would say we are giving very careful consideration as we embark on these new markets but we believe at the moment that we are appropriately pricing and have the ability to continue to receive the gross margins that we have had in the past.

Daniel Eggers – Credit Suisse

Dennis, what is the right gross margin do you think for PES given the fact that you’re having to put more liquidity out there given the fact that liquidity has gotten more expensive presumably the old line $3 to $4 megawatt hour maybe a little bit higher, that number needs to be going up. What kind of magnitude are we thinking about?

John U. Huffman

We still believe the $3 per megawatt hour gross margin range is achievable. As Dennis mentioned, we are now factoring in the cost of credit in to our pricing. So, as we go forward we fully expect to recover those types of costs.

Daniel Eggers – Credit Suisse

So does that mean you put a 10% cost of capital so $3 margin is now a $3.50 target margin or does it get picked ups somewhere else?

John U. Huffman

I guess the way think about it is not so much a margin add or its more of a cost input in to our pricing but I suppose you could look at it that way as well Dan.

Daniel Eggers – Credit Suisse

Do you guys have a sensitivity to what kind of liquidity requirement would be necessary with a dollar move up or down in natural gas prices around PES. I know you guys talked about what a one credit notch downgrade type of collateral posting would be but do you have kind of what the dollars required to be from a gas price move?

Dennis R. Wraase

I think we add in the 10Q I believe there’s information that relates to what a 1% price decline would mean both to Pepco Energy Services and to Conectiv Energy. I think it was $22 million for PES and $6 million for Conectiv Energy.

Daniel Eggers – Credit Suisse

I guess to kind of go back to the financing question again how does the slowdown in cap ex change the need to issue equity in 2009? With lower cap ex are you guys going to be able to avoid equity next year in this environment? Do you have the flexibility I guess to think that you can put off equity?

Paul H. Barry

We have not sort of laid out a specific time table. I guess our general approach will be that when the financing windows are open you have to be flexible enough to take advantage of that so we haven’t ruled out anything along those lines but we haven’t been specific with timing either.

Daniel Eggers – Credit Suisse

Have you talked to the regulators about the prospect of having some extra leverage relative to your normal target capitalization just kind of given the cost of different capital in the market right now?

Paul H. Barry

We really haven’t.

Operator

Our next question comes from the line of Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

I apologize if you guys explained all this but I did see that were some mark-to-market gains and losses and what have you. I was wondering if you could sort of run them down for the last nine months what the difference, gains and losses in those businesses? I know that you guys got some gains on economic hedges, etc., could you just elaborate a little more on that?

John U. Huffman

For Pepco Energy Services, we had a negative after tax $6.6, approximately $7 million mark-to-market loss to our economic hedges. For the nine months year-to-date that number is approximately just over $1 million.

David M. Velazquez

For Conectiv Energy, on a pre-tax basis we had a gain year-over-year of about $19 million primarily with respect to coal hedges. Of that amount you’ve got to look at it like about two thirds of that is locked in. A third of those have already settled and the remaining two thirds, about a third of those we sold against them forward so the margins are locked in on that as well.

Paul Patterson – Glenrock Associates

So they’re going to be realized over what period of time would you say the $19 million?

David M. Velazquez

I don’t know the exact period of time but typically we hedge in decreasing percentages over the next forward 36 months, much more heavily hedged in the shorter term. I say shorter term, next 12 months to 24 months.

Paul Patterson – Glenrock Associates

These are all pre-tax numbers correct?

John U. Huffman

The PES numbers were after tax.

Paul Patterson – Glenrock Associates

The PES numbers are after tax and the $19 million is?

David M. Velazquez

It’s pre-tax.

Paul Patterson – Glenrock Associates

That was for the nine months, is that correct?

David M. Velazquez

Yes.

Operator

Our next question comes from the line of [Dan Jenkins – State of Investment].

[Dan Jenkins – State of Investment]

I have some questions on the debt, on the swell. I see the short term debts up to about $880 million, is that primarily drawings on your bank lines or what’s that composed of?

Paul H. Barry

Well, we have drawn down some of the lines but [inaudible] a portion of it is that, about half.

[Dan Jenkins – State of Investment]

About half is the bank lines?

Paul H. Barry

Yes.

[Dan Jenkins – State of Investment]

Then I know you mentioned that you haven’t really thought out definitive plans but given that you’re doing the filings of first mortgage bonds and so forth, is that something that you expect to come to the debt markets relatively soon? Is that going to be before year end or probably an ’09 event?

John U. Huffman

I think it’s really a function of the markets and if they’re open and we can issue it at attractive rates but that’s how I would really characterize that. I think we have the flexibility and clearly people are able to issue first mortgage bonds in this market even at its worse so I think we would really take advantage of the markets when they’re open. But again, we’ve not been specific about timing. Right now we have an authorization for Atlantic City to issue $250 million so that would sort of be in the hopper.

[Dan Jenkins – State of Investment]

Then I was just curious when you look at the delivery sales, the other component of electric revenues was up quite a bit year-over-year. I was just wondering what was driving that?

Joseph M. Rigby

Part of what would be driving that would the increase in transmission rate.

Operator

Our next question comes from the line of Mark Segal – Canaccord Adams.

Mark Segal – Canaccord Adams

Just wondering if you could provide a bit more color on your comments regarding AMI and your plans going forward and what the time table might look like?

Dennis R. Wraase

As I said, we have authority to go ahead to Delaware and that’s the only jurisdiction so at the moment I don’t have a real time table other than what the commissions decide. I guess the key statement I made is we don’t intend to proceed in the other jurisdictions until we achieve appropriate cost recovery and timely cost recovery. So, at the moment there is no firm schedule. I would say clearly it’s pushed out from what we had originally anticipated. The only expenditures we have in our plans for next year would be to do Delaware.

Operator

It appears there are no additional questions.

Dennis R. Wraase

Thank you all for joining us and for you interest in PHI. We look forward to seeing many of you at the EEI conference. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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