QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2003

Commission
File Number

Name of Registrant, State of Incorporation, Address of Principal Executive Offices,
    and Telephone Number    

I.R.S. Employer Identification Number

001-31403

PEPCO HOLDINGS, INC.
("Pepco Holdings," a Delaware
  corporation)
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

52-2297449

001-1072

POTOMAC ELECTRIC POWER COMPANY
("Pepco," a District of
  Columbia and Virginia
  corporation)
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

53-0127880

001-13895

CONECTIV
("Conectiv," a Delaware
  corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware
Telephone: (202)872-2000

51-0377417

001-1405

DELMARVA POWER & LIGHT COMPANY
("DPL," a Delaware and
  Virginia corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware
Telephone: (202)872-2000

51-0084283

001-3559

ATLANTIC CITY ELECTRIC COMPANY
("ACE," a New Jersey
  corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware
Telephone: (202)872-2000

21-0398280

333-59558

ATLANTIC CITY ELECTRIC
  TRANSITION FUNDING LLC
("ACE Funding," a New Jersey
  corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware
Telephone: (202)872-2000

51-0408521

Continued

Securities registered pursuant to Section 12(b) of the Act:

Registrant

Title of Each Class

Name of Each Exchange on Which Registered  

Pepco Holdings

Common Stock, $.01 par value

   New York Stock
   Exchange

Pepco

Guarantee by Pepco of the 7-3/8% Trust Originated Preferred Securities issued by Potomac Electric Power Company Trust I

   New York Stock    Exchange

DPL

Guarantee by DPL of the 8.125% Cumulative Trust Preferred Capital Securities of Delaware Power Financing I

   New York Stock
   Exchange

ACE

Guarantee by ACE of the 7-3/8% Cumulative Quarterly Income Preferred Securities, issued by Atlantic Capital II

   New York Stock    Exchange

     None.

     Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X . No    .

     Indicate by check mark whether Pepco Holdings is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X  .    No      .

     Pepco, Conectiv, DPL, ACE, and ACE Funding are not accelerated filers.

     Conectiv, DPL, ACE and ACE Funding meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

Registrant

Number of Shares of Common Stock of the Registrant Outstanding at March 31, 2003

Pepco Holdings

170,439,536 ($.01 par value)

Pepco

100 ($.01 par value) (a)

Conectiv

100 ($.01 par value) (a)

DPL

1,000 ($2.25 par value) (b)

ACE

18,320,937 ($3 par value)(b)

ACE Funding

None (c)

(a)

As of August 1, 2002, all voting and non-voting common equity is owned
  by Pepco Holdings.

(b)

All voting and non-voting common equity is owned by Conectiv.

(c)

All voting and non-voting common equity is owned by ACE.

DOCUMENTS INCORPORATED BY REFERENCE

     THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PEPCO HOLDINGS, PEPCO, CONECTIV, DPL, ACE, AND ACE FUNDING. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

TABLE OF CONTENTS

Page

PART I

FINANCIAL INFORMATION

  Item 1.

-

Financial Statements

1

  Item 2.

-

Management's Discussion and Analysis of
   Financial Condition and Results of
   Operations

73

  Item 3.

-

Quantitative and Qualitative Disclosures
   About Market Risk

117

  Item 4.

-

Controls and Procedures

117

PART II

OTHER INFORMATION

  Item 1.

-

Legal Proceedings

120

  Item 2.

-

Changes in Securities and Use of Proceeds

123

  Item 3.

-

Defaults Upon Senior Securities

123

  Item 4.

-

Submission of Matters to a Vote of Security Holders

123

  Item 5.

-

Other Information

124

  Item 6.

-

Exhibits and Reports on Form 8-K

125

  Signatures

133

  Principal Executive Officer and Principal Financial Officer Certifications

134

TABLE OF CONTENTS - EXHIBITS

Exh. No.

Registrant(s)

Description of Exhibit

Page

12.1

PHI

Statements Re: Computation of Ratios

126

12.2

Pepco

Statements Re: Computation of Ratios

127

12.3

Conectiv

Statements Re: Computation of Ratios

128

12.4

DPL

Statements Re: Computation of Ratios

129

12.5

ACE

Statements Re: Computation of Ratios

130

15

PHI

Independent Accountants' Awareness Letter

131

99.1

PHI

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

158

99.2

Pepco

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

159

99.3

Conectiv

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

160

99.4

DPL

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

161

99.5

ACE

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

162

99.6

ACEF

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

163

PART I    FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

     Listed below is a table that sets forth, for each registrant, the page number where the information is contained herein.

                      Registrants                  

Item

Pepco
Holdings

Pepco

Conectiv

DPL

ACE

ACE
Funding

Report of Independent
  Accountants

3

N/A

N/A

N/A

N/A

N/A

Consolidated Statements
  of Earnings

4

 25

 37

 51

 59

 68

Consolidated Statements
  of Comprehensive Income

5

 26

 38

N/A

N/A

N/A

Consolidated Balance
  Sheets

6

 27

 39

 52

 60

 69

Consolidated Statements
  of Cash Flows

8

 29

 40

 54

 62

 70

Notes to Consolidated
  Financial Statements

9

 30

 42

 55

 63

 71

THIS PAGE LEFT INTENTIONALLY BLANK.

Report of Independent Accountants

To the Shareholders and Board of Directors
   of Pepco Holdings, Inc.

We have reviewed the accompanying consolidated balance sheet of Pepco Holdings, Inc. and its subsidiaries (the Company) as of March 31, 2003, and the related consolidated statements of (loss) earnings and consolidated statements of comprehensive (loss) income for each of the three-month periods ended March 31, 2003 and 2002 and the consolidated statement of cash flows for the three-month periods ended March 31, 2003 and 2002. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of earnings, and the consolidated statements of comprehensive income, and consolidated statements of cash flows for the year then ended (not presented herein), and in our report dated February 10, 2003, except as to Note (a) to Note 11 for which the date is February 28, 2003 and as to the eleventh and twelfth paragraphs of Note 15 for which the date is March 4, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP
Washington, DC
May 14, 2003

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEPCO HOLDINGS, INC.

     For additional information, other than the information disclosed in the Notes to Consolidated Financial Statements section herein, refer to Item 8. Financial Statements and Supplementary Data of the Company's 2002 Form 10-K.

(1)  ORGANIZATION

     Pepco Holdings, Inc. (Pepco Holdings or the Company, formerly New RC, Inc.), a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting Potomac Electric Power Company's (Pepco) acquisition of Conectiv. In accordance with the terms of the merger agreement, upon the consummation of the merger on August 1, 2002, Pepco and Conectiv became wholly owned subsidiaries of Pepco Holdings. Additionally, Pepco, through a series of transactions, transferred its ownership interests in its pre-merger subsidiaries Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services) to Pepco Holdings and PCI transferred its ownership interest in its pre-merger subsidiary Pepco Communications, Inc. (Pepcom) to Pepco Holdings. These transactions resulted in PCI, Pepco Energy Services, and Pepcom becomin g wholly owned direct subsidiaries of Pepco Holdings. Additionally, PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries; therefore, Pepco Holdings has a subsidiary service company that provides a variety of support services to Pepco Holdings and its subsidiaries. The costs of the service company are directly assigned or allocated to Pepco Holdings' or its subsidiaries based on prescribed allocation factors listed in the service agreement filed with, and approved by, the Securities and Exchange Commission (SEC). Pepco Holdings manages its operations as described below.

Power Delivery

     The largest component of Pepco Holdings' business is power delivery, which is conducted through its subsidiaries Pepco, Delmarva Power & Light Company (DPL), and Atlantic City Electric Company (ACE). Pepco, DPL and ACE are all regulated public utilities in the jurisdictions in which they serve customers. The operations of DPL and ACE collectively are referred to as "Conectiv Power Delivery."

Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements entered into with regulatory authorities, Pepco is required to provide default electricity supply (referred to as "standard offer service" or "SOS") at specified rates to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these standard offer service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would be requir ed to seek one or more alternative sources of supply, which may include entry into long-term or short-term agreements, purchases on the spot market or a combination of such sources. A failure by Mirant could have a material adverse effect on our results of operations until the earlier of (1) the replacement of the Mirant supply with alternative sources of electricity on comparable terms and (2) the expiration of Pepco's specified rate standard offer service obligations; however, we do not believe that a Mirant default would have a material adverse impact on our financial condition.

     On April 29, 2003, the Maryland Public Service Commission (Maryland Commission) approved a settlement in Phase I of Maryland Case No. 8908 to extend the provision of SOS that allows local utilities to continue to supply customers with electricity after existing rate caps/freezes expire in July 2004 at market prices. Pepco will provide SOS to all residential customers from July 1, 2004 through May 31, 2008. There are no minimum stay provisions for residential customers, therefore they may stop and resume standard offer service at any time. Pepco will obtain power for the market rate standard offer service through a competitive wholesale bidding process.

Conectiv Power Delivery

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides gas distribution service in northern Delaware. Under regulatory settlements, DPL is required to provide standard offer electricity service at specified rates to residential customers in Maryland until July 2004 and to non-residential customers in Maryland until July 2003 and to provide default electricity service at specified rates to customers in Delaware until May 2006 and to customers in Virginia until January 2004 (which may be extended to July 2007). Conectiv Energy (described below) supplies all of DPL's standard offer and default service load requirements under a supply agreement that ends May 31, 2006. The terms of the supply agreement are structured to coincide with DPL's load requirements under each of its regulatory settlements. Conectiv Energy's resources for supplying DPL's standard offer and def ault service load include electricity generated by Conectiv Energy's plants and electricity purchased under long-term agreements or in the spot market. DPL purchases gas supplies for its customers from marketers and producers in the spot market and under short-term and long-term agreements.

     As discussed, on April 29, 2003, the Maryland Commission approved a settlement in Phase I of Maryland Case No. 8908 to extend the provision of standard offer service that allows local utilities to continue to supply customers with electricity after existing rate caps/freezes expire in July 2004 at market prices. DPL will provide SOS to all residential customers from July 1, 2004 through May 31, 2008. There are no minimum stay provisions for residential customers, therefore they may stop and resume standard offer service at any time. DPL will obtain power for the market rate standard offer service through a competitive wholesale bidding process.

     ACE is engaged in the generation, transmission, and distribution of electricity in southern New Jersey. ACE has default service obligations, known as Basic Generation Service (BGS), for approximately 20 percent of the electricity supply to its customers. ACE expects to fulfill these obligations through the generation output from its fossil fuel-fired generating plants and through existing purchase power agreements with non-utility generators (NUG). As discussed in Note 14. Commitments and Contingencies herein, in January 2003, ACE terminated its competitive bidding process to sell these generation assets.

     ACE formed Atlantic City Electric Transition Funding LLC (ACE Funding) during 2001. ACE Transition Funding is a wholly owned subsidiary of ACE. ACE Funding was organized for the sole purpose of purchasing and owning Bondable Transition Property (BTP), issuing transition bonds (Bonds) to fund the purchasing of BTP, pledging its interest in BTP and other collateral to the Trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes.

Competitive Energy

     The competitive energy component of the Company's business is conducted through subsidiaries of Conectiv Energy Holding Company (collectively referred to herein as Conectiv Energy) and Pepco Energy Services.

Conectiv Energy

     Conectiv Energy supplies power to DPL and provides wholesale power and ancillary services to the Pennsylvania/New Jersey/Maryland (PJM) power pool. Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility and multi-fuel capability that can quickly change their output level on an economic basis. Mid-merit plants generally are operated during times when demand for electricity rises and prices are higher. During the first quarter of 2003, Conectiv Energy had a loss of $92.3 million. Excluding the impact of the loss of $65.7 million on the cancellation of a combustion turbine contract, Conectiv Energy lost $26.6 million. The $26.6 million was primarily due to net trading losses that resulted from a dramatic rise in natural gas futures prices during February 2003. Pepco Holdings had previously reported a net trading loss of $20 million for February in the Form 8-K dated March 3, 2003. The additional net after-tax trading losses of approximately $6 million were incurred in January. The net trading loss of approximately $26.6 million is net of an after-tax gain of $15 million on the sale of a purchase power contract in February 2003. In response to the trading losses, in early March 2003, Pepco Holdings ceased all proprietary trading activities.

     As of March 31, 2003, Conectiv Energy owned and operated electric generating plants with 3,006 MW of capacity. In January 2002, Conectiv Energy began construction of a 1,100 MW combined cycle plant with six combustion turbines at a site in Bethlehem, Pennsylvania that is expected to become fully operational in stages that added 306 MW in 2002 (resulting from the installation of three CTs), 279 MW in the first quarter of 2003 (resulting from the installation of an additional two CTs and an upgrade of the CTs installed during 2002) and is expected to add an additional 505 MW of capacity by the end of 2003 (resulting from the installation of an additional CT and two waste heat recovery boilers and steam generating units).

     Conectiv Energy had entered into contracts for the delivery of seven combustion turbines (CTs). These contracts included one with General Electric for the purchase of four CTs (the GE CTs). Through April 25, 2003, payments totaling approximately $131 million have been made for the GE CTs. As part of the acquisition of Conectiv by Pepco Holdings in August of 2002, the book value related to the CTs and associated equipment (including the payments already made as well as the future payments called for under the contracts) was adjusted downward by approximately 35%, to the then-fair market value. Approximately $54 million of the August fair value adjustment was related to the GE CTs, and another $4 million of the adjustment was related to ancillary equipment. The adjustment was recorded by Pepco Holdings and was not pushed down to, and recorded by, Conectiv.

     Pepco Holdings has previously reported that, in light of continuing declines in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv Energy was considering all of its options, including further delaying delivery of equipment, delaying construction, selling the equipment and canceling equipment orders. Because of uncertainty in the energy markets, the decline in the market for CTs and the current high level of capacity reserves within the PJM power pool, Conectiv Energy provided notice to General Electric canceling the contract for delivery of the GE CTs. The net unfavorable impact on Pepco Holdings of this cancellation, recorded in the first quarter 2003, is $52.8 million before tax, $31.1 million after tax, comprised of the fees associated with cancellation of the GE CTs, all associated site development and engineering costs and the costs associated with c ancellation of ancillary equipment orders. The unfavorable impact of the cancellation specified above is also net of over $51 million in cash associated with pre-payments on the GE CT orders, which General Electric is required to refund as a result of the cancellation. There will be a positive cash impact in the second quarter related to this refund. The cancellation of the GE CTs and associated equipment is one of the steps being taken by the company to proactively deal with the risks it would otherwise have in the merchant energy sector.

     After the cancellation of the four General Electric CTs discussed above, Conectiv Energy continues to own three CTs which were delivered in 2002. The CTs have a carrying value of $52.5 million when adjusted to reflect the fair market adjustment made at the time Conectiv was acquired by Pepco Holdings. This fair market value adjustment was recorded by Pepco Holdings and was not pushed down to, and recorded by Conectiv. Due to the decline in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv delayed the construction and installation of these CTs. Whether these turbines will be installed and the actual location and timing of the construction and installation will be determined by market demand or transmission system needs and requirements.

Pepco Energy Services

     Pepco Energy Services provides retail electricity and natural gas to residential, commercial, industrial and governmental customers in the District of Columbia and states in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management solutions to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, equipment operation and maintenance, fuel management, and home service agreements. In addition, Pepco Energy Services owns electricity generation plants with approximately 800 MW of peaking capacity, the output of which is sold in the wholesale market. Pepco Energy Services also purchases and sells electricity and natural gas in the wholesale markets to support its commitments to its retail customers.

Other Non-Regulated

     This component of Pepco Holdings' business is conducted primarily through its subsidiaries PCI and Pepcom.

PCI

     PCI manages a portfolio of financial investments and strategic operating businesses that are designed to provide supplemental earnings and cash flow. PCI has been redirecting its investment operations to focus on investments that are related to the energy industry, such as energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets, located outside of the United States, that provide a long-term, stable stream of cash flow and earnings. PCI also owns a ten-story, 360,000 square foot office building in downtown Washington, D.C., which is leased to Pepco and serves as Pepco Holdings' and Pepco's corporate headquarters.

     PCI's utility industry products and services are provided through various operating companies. Its underground electric services company, W.A. Chester, provides high voltage construction and maintenance services to utilities and to other customers throughout the United States. PCI also owns Severn Cable, which provides low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

Pepcom

     Pepcom owns a 50% interest in Starpower Communications, LLC (Starpower), a joint venture with RCN Corporation, which provides cable and telecommunication services to households in the Washington, D.C. area.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Pepco Holdings and its wholly owned subsidiaries. All intercompany balances and transactions between subsidiaries have been eliminated. Investments in entities in which Pepco Holdings has a 20% to 50% interest are accounted for using the equity method of accounting. Under the equity method, investments are initially carried at cost and subsequently adjusted for the Company's proportionate share of the investees' undistributed earnings or losses and dividends. Ownership interests in other entities of less than 20% are accounted for using the cost method of accounting. Certain prior period amounts have been reclassified in order to conform to the current period presentation.

Consolidated Financial Statement Composition

     The information furnished in the accompanying consolidated financial statements reflects all adjustments (which consist only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the Company's results of operations for the interim periods presented.

     The accompanying consolidated statements of earnings, consolidated statements of comprehensive income, and consolidated statements of cash flows for the three months ended March 31, 2003 include Pepco Holdings and its subsidiaries results for the full period. However, these statements for the three months ended March 31, 2002, as previously reported by Pepco, include only the consolidated operations of Pepco and its pre-merger subsidiaries. Accordingly, due to the application of the purchase method of accounting that was used to record the merger transaction, the consolidated balances included in the statements referred to above for the three months ended March 31, 2003 and 2002 are not comparable. The amounts presented in the accompanying consolidated balance sheets are comparable as both periods presented reflect the impact of the merger transaction.

     For additional information refer to the pro forma financial information contained herein in Note 5. Pro Forma Information.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Examples of estimates used by the Company include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, pension assumptions, and fair values used in the purchase method of accounting and the resulting goodwill balance. Although Pepco Holdings believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.

Energy Trading Activities

     In 2002, the EITF issued a pronouncement entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Beginning with July 2002, all of their trades were recorded net in accordance with EITF 02-3 and therefore no reclassification was required for activities after July 2002. Accordingly, no revenue or expense reclassifications are required for Conectiv Energy's portion of Pepco Holdings' results. However, Pepco Energy Services' revenues decreased from $157.1 million to $147.1 million for the three months ended March 31, 2002. There is no impact on Conectiv Energy's or Pepco Energy Services' overall financial condition or net results of operations as a result of the implementation of EITF 02-3.

Severance Costs

     Through December 31, 2002, Pepco Holdings accounted for its subsidiaries' severance costs in accordance with the provisions of EITF No. 94-3 (EITF 94-3) "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." For any activities after January 1, 2003, Pepco Holdings will apply the provisions of newly issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

     During 2002, Pepco Holdings' management approved initiatives by Pepco and Conectiv to streamline their operating structure by reducing the number of employees at each company. These initiatives met the criteria for the accounting treatment provided under EITF 94-3. As of December 31, 2002, Pepco Holdings accrued $23.2 million of severance costs in connection with the plan. These costs relate to 274 employees. Pepco Holdings expects to pay all severance costs by the end of 2003.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which was adopted by Pepco Holdings on January 1, 2003. This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. Based on the implementation of SFAS No. 143, at March 31, 2003, $249 million in asset removal costs that are not legal obligations pursuant to the statement ($175.5 million for DPL and $73.5 million for Pepco) and $245.3 million at December 31, 2002 ($173.2 million for DPL and $72.1 million for Pepco) have been accrued and are embedded in accumulated depreciation in the accompanying consolidated balance sheets.

     Pepco Holdings and its subsidiaries have applied the provisions of FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to their agreements that contain guarantee clauses. These provisions expand those required by FASB Statement No. 5, "Accounting for Contingencies," by requiring a guarantor to recognize a liability on its balance sheet for the fair value of obligation it assumes under certain guarantees issued or modified after December 31, 2002 and to disclose certain types of guarantees, even if the likelihood of requiring the guarantor's performance under the guarantee is remote.

     As of March 31, 2003, Pepco Holdings and its subsidiaries did not have material obligations under guarantees issued or modified after December 31, 2002, which are required to be recognized as a liability on the balance sheet. Refer to Note 4. Commitments and Contingencies, herein, for a summary of Pepco Holdings' guarantees and other commitments.

     In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses consolidation and/or disclosure by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to finance their activities without additional subordinated support from other parties, or (2) the equity investors lack voting rights, the obligation to absorb expected losses or the right to fully receive expected residual returns. Pepco Holdings does not have an interest in any entities that require disclosure or consolidation as a result of adopting the provisions of FIN 46.

(3)  SEGMENT INFORMATION

     Based on the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," Pepco Holdings' management has identified the following reportable segments: Pepco, Conectiv Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated. Intercompany (intersegment) revenues and expenses are not eliminated at the segment level for purposes of presenting segment financial results. Elimination of these intercompany amounts is accomplished for Pepco Holdings' consolidated results through the "Corporate and Other" column. Segment financial information for the three months ended March 31, 2003 and 2002 is as follows.

(a)

These amounts reflect the operating results of PHI and its subsidiaries for the full three month period ended March 31, 2003. These amounts are not comparable with the three months ended March 31, 2002 results presented on the following page, which include only the results of Pepco and its pre-merger subsidiaries, as previously reported by Pepco.

(b)

"Corporate & Other" primarily includes the elimination of all intercompany operating revenues and expenses. In addition, operating expense includes the reversal of a purchase accounting adjustment related to the cancellation of the Conectiv Energy CTs of $57.9 million ($34.6 million after tax), as well as unallocated PHI (parent company) capital costs, such as acquisition financing costs as well as depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002.

(c)

Operating expense includes $110.7 million related to the cancellation of the CT contract. Net loss reflects the after-tax impact of the cancellation of $65.7 million.

(a)

These amounts reflect only the operations of Pepco and its pre-merger subsidiaries, as previously reported by Pepco. These amounts are not comparable with the three months ended March 31, 2003 results presented on the previous page, which include PHI and its subsidiaries results for the entire first quarter of 2003.

(b)

"Corporate & Other" represents the elimination of intercompany rent paid by Pepco to PCI for Pepco's lease of office space in an office building owned by PCI.

(4)   COMMITMENTS AND CONTINGENCIES

Rate Changes

     On February 3, 2003, ACE filed a petition with the New Jersey Board of Public Utilities (NJBPU) to increase its electric distribution rates in New Jersey. The petition seeks a rate increase of approximately of $68.4 million in electric delivery revenues, which equates to an increase in average total electricity rates of 6.9 percent overall. The filing requests a continuation of the currently authorized 12.5% ROE as well as the recovery of several regulatory assets, including carrying costs, over a four-year period. This is the first increase requested for electric distribution rates since 1992. ACE's Petition requested that this increase be made effective for service rendered on and after August 1, 2003. ACE cannot predict at this time the outcome of this filing.

     On March 31, 2003, DPL filed with the Delaware Public Service Commission for a gas base rate increase of $16.8 million, or an increase of 12.7% in total operating revenue. The filing includes a request for a ROE of 12.5%. DPL is currently authorized a ROE of 11.5% in Delaware. This is the first increase requested for its gas distribution since 1994. The Commission suspended the requested increase pending evidentiary hearings, so the Company will exercise its statutory right to place an interim base rate increase of 1.9% into effect on May 30, 2003.

Securitization

     On January 31, 2003, ACE filed a petition with the NJBPU seeking an administrative determination of stranded costs associated with the B. L. England ("BLE") generating facility. The net after tax stranded costs included in the petition were approximately $151 million. An administrative determination of the stranded costs is needed due to the cancelled sale of the plant.

     On February 5, 2003, the NJBPU issued an order on its own initiative seeking input from Atlantic and the Ratepayer Advocate within 10 days as to whether and by how much to cut the 13% pre-tax return that Atlantic is currently authorized to earn on BLE. Atlantic responded on February 18^th with arguments that: 1) reduced costs to ratepayers could be achieved legally through timely approvals by the NJBPU of the stranded cost filing made by Atlantic on January 31, 2003, and a securitization filing made the week of February 10; and 2) it would be unlawful, perhaps unconstitutional, and a breach of settlement and prior orders for the NJBPU to deny a fair recovery on prudently incurred investment and to do so without evidentiary hearings or other due process. On April 21, 2003, the NJBPU issued an order making the return previously allowed on BLE interim, as of the date of the order, and directing that the issue of the appropriate return for BLE be included in the stranded cost proceeding.

     On February 14, 2003, ACE filed a Bondable Stranded Costs Rate Order Petition with the NJBPU. The petition requests authority to issue $160 million of Transition Bonds to finance the recovery of stranded costs associated with BLE. This proceeding should move in parallel with the proceeding filed in January seeking an administrative determination of the stranded costs associated with BLE.

Restructuring Deferral

     On August 1, 2002, in accordance with the provisions of New Jersey's Electric Discount and Energy Competition Act ("the Act") and the NJBPU Final Decision and Order concerning the restructuring of ACE's electric utility business, ACE petitioned the NJBPU for a $71.6 million, or 8.4% annualized increase in electric rates, to be effective on August 1, 2003. This proposed rate increase is required to recover deferred costs incurred by ACE, as a result of the NJBPU's implementation of the Act. The deferred costs were incurred by ACE over the four-year period August 1999 through July 31, 2003. The requested increase is required to permit ACE to recover its deferred costs over a four-year period beginning August 1, 2003 and to reset its rates as so an under-recovery of certain costs is no longer embedded in ACE's rates. ACE's recovery of the deferred costs is subject to review and approval by the NJBPU in accordance with the Act. Hearings relate d to this filing were held in February 2003. Briefs were filed on March 21, 2003 and Reply Briefs filed on April 7, 2003. An Initial Decision by the Administrative Law Judge is expected by June 1, 2003. It is anticipated that the NJBPU will render its decision of this proceeding by August 1, 2003.

Pepco Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that is relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Three of the parties in the case file d comments urging the D. C. Commission to decide the tax issues now on the basis of the proposed rule. Pepco filed comments in reply to those comments, in which Pepco stated that the courts have held and the IRS has stated that proposed rules are not authoritative and that no decision should be issued on the basis of proposed rules. Instead, Pepco argued that the only prudent course of action is for the D.C. Commission to await the issuance of final regulations relating to the tax issues and then allow the parties to file supplemental briefs on the tax issues. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing payments to D.C. customers. Su ch additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial condition. It is impossible to predict when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. The principal issue in the case is the same normalization issue that was raised in the D.C. case. On March 4, 2003, the IRS issued a NOPR that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 25, 2003. Following the filing of comments by Pepco and two other parties, the Hearing Examiner on April 8, 2003: (1) postponed his earlier decision establishing briefing dates on the question of the impact of the proposed rules on the tax issues until after the June 25, 2003 public hearing:(2) allowed the Staff of the Commission and any other parties to submit motions by April 21, 2003 relating to the interpretation of current tax law as set forth in the preamble to the proposed rul es and the effect thereof on the tax issues; and (3) allowed Pepco and any other party to file a response to any motion filed by Staff and other parties by April 30, 2003. Staff filed a motion on April 21, 2003, in which it argued that immediate flow through to customers of a portion of the excess deferred income taxes and accumulated deferred investment tax credits can be authorized now based on the IRS NOPR. Pepco filed a response in opposition to Staff's motion on April 30, 2003, in which, among other things, Pepco argued that no action should be taken on the basis of proposed regulations because, as Pepco stated in a similar pleading in the District of Columbia divestiture proceeds case, proposed regulations are not authoritative. The Hearing Examiner will issue a ruling on Staff's motion, although there is no time within which he must issue a ruling. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regul ations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential also exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial condition. It is impossible to predict when the Hearing Examiner or the Maryland Commission will issue their decisions.

Third Party Guarantees

     As of March 31, 2003, Pepco Holdings and its subsidiaries were a party to a variety of agreements pursuant to which they were a guarantor for credit facilities, standby letters of credit, performance residual value, and other commitments and obligations` as follows:

     At March 31, 2003, Pepco Holdings and its subsidiaries has $499.9 million of obligations to third parties. The detail of these obligations is summarized below:

                 Guarantor               

PHI

Pepco

Conectiv

PCI

Total

Energy trading obligations of
  Conectiv Energy (1)

$108.0 

-    

$102.5  

-  

$210.5

Energy procurement obligations
  of Pepco Energy Services (1)

46.9 

-    

-  

-  

46.9

Standby letters of credit of
  Pepco Holdings (2)

67.5 

-    

-  

-  

67.5

Guaranteed lease residual
  values (3)

- 

.5    

6.1  

-  

6.6

Credit facility obligations of
  Pepco Energy Services (4)

61.5 

-    

-  

-  

61.5

Construction performance
  guarantees (5)

56.8 

-    

15.7  

-  

72.5

Other (6)

     - 

   -    

  27.7  

 6.7

  34.4

  Total

$340.7 

$0.5    

$152.0  

$6.7

$499.9

1.

Pepco Holdings and Conectiv have contractual commitments for performance and related payments of Conectiv Energy and Pepco Energy Services to counter parties related to routine energy trading and procurement obligations, including requirements under BGS contracts for ACE.

2.

Pepco Holdings has issued standby letters of credit of $67.5 million on behalf of subsidiaries operations related to Conectiv Energy's competitive energy activities and third party construction performance. These standby letters of credit were put into place in order to allow the subsidiaries flexibility needed to conduct business with counterparties without having to post substantial cash collateral. While the exposure under these standby letters of credit is $67.5 million, Pepco Holdings does not expect to fund the full amount. As of March 31, 2003, the fair value of obligations under these standby letters of credit was not recorded in the Consolidated Balance Sheets.

3.

Subsidiaries of Pepco Holdings have guaranteed residual values in excess of fair value related to certain equipment and fleet vehicles held through lease agreements. As of March 31, 2003, obligations under the guarantees were approximately $6.6 million ($6.1 million by DPL and ACE). Assets leased under agreements subject to residual value guarantees are typically for periods ranging from 2 years to 10 years. Historically, payments under the guarantee have not been made by the company as, under normal conditions, the contract runs to full term at which time the residual value is minimal. As such, Pepco Holdings believes the likelihood of requiring payment under the guarantee is remote.

4.

Pepco Holdings has issued a guarantee on behalf of a subsidiary's 50% unconsolidated investment in a partnership, for repayment of borrowings under a credit facility of approximately $61.5 million. The maximum potential future payments that could be required to be made for guaranteeing the repayment of borrowings under the credit facility are $75.0 million. There are no obligations related to the borrowings under the credit facility.

5.

Pepco Holdings has performance obligations of $56.8 million related to Pepco Energy Services' performance obligations for construction and operations services. Pepco Energy Services is meeting all of its obligations for construction and operations contracts. Conectiv has performance obligations of $15.7 million relating to obligations to third party suppliers of CTs.

6.

Other guarantees comprise:

o

PCI has guaranteed facility rental obligations related to contracts entered into by Starpower Communications LLC. In addition, it has agreed to Indemnify RCN for 50% of any payments RCN makes under the Starpower franchise and construction performance bonds.  As of March 31, 2003, the guarantees cover the remaining $4.3 million in rental obligations and $2.4 million in franchise and construction performance bonds issued.

o

Other Conectiv obligations include a commitment for a bond payment issued by a subsidiary of $14.7 million and a subsidiary building lease of $4.6 million. Conectiv does not expect to fund the full amount of the exposure under these guarantees.

(5)   PRO FORMA INFORMATION

     Due to the completion of Pepco Holdings merger with Conectiv on August , 2002, the accompanying consolidated financial statements include Conectiv and its pre merger subsidiaries operating results commencing on August 1, 2002. Accordingly, as discussed in Note (2) Summary of Significant Accounting Policies, herein, Pepco Holdings' consolidated operating results for the quarter ended March 31, 2003 are not comparable with the corresponding period in 2002.

     The following pro forma information for Pepco Holdings for the three months ended March 31, 2002, which is based on unaudited data, gives effect to the Company's merger with Conectiv as if it had been completed on January 1, 2002. This information does not reflect future revenues or cost savings that may result from the merger and is not indicative of actual results of operations had the merger occurred at the beginning of the period presented or of results that may occur in the future.

For the Three Months Ended
March 31, 2002
(In Millions, except Share Data)

Operating Revenue

$1,551.0

Net Income

    41.9

Earnings per Share of Common Stock

    $.26

     The primary pro forma adjustments were related to interest expense incurred on acquisition debt and interest income on existing funds used to partially fund the acquisition. Additionally, included in the calculation of pro forma net income presented above is an after-tax gain of $9.4 million related to an asset divestiture. Pro forma weighted average shares outstanding for the 2002 quarter were 163.4 million shares.

(6)  DEBT

     On January 15, 2003, ACE redeemed at maturity $20.0 million of secured 6% Medium Term Notes.

     On January 27, 2003, ACE redeemed at maturity $10.0 million of secured 7.16% Medium Term Notes, $8.0 million of secured 7.19% Medium Term Notes, and $2.0 million of secured 7.20% Medium Term Notes.

     On February 28, 2003, ACE redeemed 2,800,000 shares, or $70.0 million, of its $25 per share, 8.25% preferred trust securities.

     On March 24, 2003, ACE redeemed $19.5 million of secured 7.98% Medium Term Notes due 5/19/2004, $10.5 million of 7.97% Medium Term Notes due 5/19/2004, and $28.0 million of 7.125% Medium Term Notes due 2/02/2004.

     On May 1, 2003, DPL redeemed $32.0 million of 8.15% First Mortgage Bonds due October 1, 2015.

THIS PAGE LEFT INTENTIONALLY BLANK.

POTOMAC ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

Three Months Ended March 31,

   2003   

   2002   

(Millions of Dollars)

Operating Revenue

   Utility

$333.4 

$316.1 

   Competitive

- 

173.1 

      Total Operating Revenue

333.4 

489.2 

Operating Expenses

   Fuel and purchased energy

134.2 

255.7 

   Other operation and maintenance

59.7 

87.2 

   Depreciation and amortization

39.5 

37.9 

   Other taxes

45.0 

45.5 

      Total Operating Expenses

278.4 

426.3 

Operating Income

55.0 

62.9 

Other Income (Expenses)

   Interest and dividend income

1.8 

6.3 

   Interest expense

(19.3)

(31.4)

   Loss from Equity Investments, principally
     a Telecommunication Entity

- 

(.4)

   Other (expense) income

(2.6)

.6 

      Total Other Expenses

(20.1)

(24.9)

Distributions on Preferred Securities of
  Subsidiary Trust

2.3 

2.3 

Income Tax Expense

12.6 

11.1 

Net Income

20.0 

24.6 

Dividends on Preferred Stock

1.2 

1.3 

Earnings Available for Common Stock

$ 18.8 

$ 23.3 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited at March 31, 2003)

March 31,
2003

December 31,
2002

ASSETS

(Millions of Dollars)

CURRENT ASSETS

   Cash and cash equivalents

$17.6  

$   13.9  

   Accounts receivable, less allowance for uncollectible
     accounts of $3.7 million and $3.6 million

375.8  

373.4  

   Fuel, materials and supplies - at average cost

38.9  

37.8  

   Prepaid expenses and other

24.4  

10.2  

         Total Current Assets

456.7  

435.3  

INVESTMENTS AND OTHER ASSETS

   Regulatory assets, net

3.1  

-  

   Prepaid pension expense

177.3  

182.3  

   Other

110.9  

108.5  

         Total Investments and Other Assets

291.3  

290.8  

PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment

4,588.6  

4,550.0  

   Accumulated depreciation

(1,777.9) 

(1,739.7) 

         Net Property, Plant and Equipment

2,810.7  

2,810.3  

         TOTAL ASSETS

$3,558.7  

$3,536.4  

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited at March 31, 2003)

March 31,
2003

December 31,
2002

LIABILITIES AND SHAREHOLDER'S EQUITY

(Millions of Dollars)

CURRENT LIABILITIES

   Short-term debt

$   86.1 

$   90.0 

   Accounts payable and accrued liabilities

181.9 

167.4 

   Capital lease obligations due within one year

15.6 

15.6 

   Interest and taxes accrued

67.4 

57.6 

   Other

178.2 

164.4 

         Total Current Liabilities

529.2 

495.0 

DEFERRED CREDITS

   Regulatory liabilities, net

- 

15.9 

   Income taxes

593.2 

589.4 

   Investment tax credits

22.1 

22.6 

   Other

26.5 

28.1 

         Total Deferred Credits

641.8 

656.0 

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

  Long-term debt

1,083.7 

1,083.5 

  Capital lease obligations

117.7 

118.7 

         Total Long-Term Debt and Capital Lease Obligations

1,201.4 

1,202.2 

COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
   OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR
   SUBORDINATED DEBENTURES

125.0 

125.0 

PREFERRED STOCK

   Serial preferred stock

35.3 

35.3 

   Redeemable serial preferred stock

47.5 

47.5 

         Total Preferred Stock

82.8 

82.8 

COMMITMENTS AND CONTINGENCIES

SHAREHOLDER'S EQUITY

   Common stock, $.01 par value, authorized 400,000,000 shares,
     - issued 100 shares

- 

-