Pepco Holdings Reports Third-Quarter 2006 Earnings; Conference Call Scheduled
Thursday, November 02, 2006
Pepco Holdings, Inc. (NYSE: POM) today reported third quarter 2006 consolidated earnings of $104.0 million, or 54 cents per share, compared to $168.0 million, or 89 cents per share, in the third quarter of 2005. Excluding the special items described below, earnings for the 2006 quarter would have been $111.9 million, or 58 cents per share, compared to $135.6 million, or 72 cents per share, for the 2005 quarter. The weighted average number of shares outstanding for the third quarter of 2006 was 190.8 million compared to 189.2 million for the third quarter of 2005.
The earnings decrease, excluding special items, for the third quarter of 2006 as compared to the 2005 quarter was due primarily to lower kWh sales at Power Delivery driven by milder weather, lower network transmission revenue primarily due to a true-up in the 2006 transmission rates for rates in effect in 2005, and lower generating output at Conectiv Energy reflecting milder weather, higher fuel oil prices and an unplanned outage at the Hay Road generating facility. The impact of these decreases was partially offset by higher Full Requirements Load Service earnings at Conectiv Energy as a result of new, higher margin supply contracts and a mark-to-market gain on a supply contract, and higher earnings from Conectiv Energy's Other Power, Oil and Gas Marketing Services.
"Earnings for the quarter clearly were negatively impacted by the weather relative to last year, driven by a 15% decrease in cooling degree days," said Dennis R. Wraase, Chairman, President and Chief Executive Officer. "And, while year-to-date we experienced customer growth of 1.2% in our service territory, weather adjusted kWh sales increased by just 0.2%. Sales were impacted by lower customer usage due to, we believe, customer conservation efforts in light of rising energy prices." He added, "We continue to make progress in the execution of our regulatory plan. In August, we filed for a distribution rate increase for our gas delivery business, and we still anticipate filing three electric distribution cases prior to year-end. Conectiv Energy and Pepco Energy Services both continue to make good progress in executing their strategies. We are pleased with the recent Reliability Pricing Model settlement now in front of the FERC, and our retail business continues to provide solid financial results as they focus on the commercial and industrial market."
For the nine months ended Sept. 30, 2006, consolidated earnings were $212.0 million, or $1.11 per share, compared to $289.1 million, or $1.53 per share, for the same period in the prior year. Excluding the special items described below, earnings for the nine months ended Sept. 30, 2006 would have been $216.2 million, or $1.13 per share, compared to $251.6 million, or $1.33 per share, for the first nine months of 2005. The weighted average number of shares outstanding for the nine months ended Sept. 30, 2006 was 190.4 million compared to 188.8 million for the same period in the prior year.
The decrease in earnings, excluding special items, for the nine months ended Sept. 30, 2006, compared to the same period in the prior year was driven primarily by lower kWh sales at Power Delivery due to milder weather, lower network transmission revenue primarily due to a true-up in the 2006 transmission rates for rates in effect in 2005, lower generating output at Conectiv Energy reflecting milder weather, higher fuel oil prices and an unplanned outage at Hay Road, and higher operation and maintenance expenses at Power Delivery and Conectiv Energy. The impact of these decreases was partially offset by higher Full Requirements Load Service earnings at Conectiv Energy as a result of new, higher margin supply contracts and a mark-to-market gain on a supply contract, higher earnings from Conectiv Energy's Other Power, Oil and Gas Marketing Services, higher earnings at Pepco Energy Services driven by its retail commodity and energy services businesses and an unfavorable unbilled revenue adjustment at Power Delivery in the second quarter of 2005.
Third-Quarter Highlights
Mirant
- On Aug. 9, 2006, the Bankruptcy Court approved the settlement agreement entered into by Pepco and Mirant. Under the settlement, Pepco will allow Mirant to reject the back-to-back agreement relating to Pepco's power purchase agreement with Panda-Brandywine in exchange for a payment of $450 million. On Aug. 18, 2006, certain creditors of Mirant appealed the approval order to the District Court. Pursuant to the settlement agreement, upon approval of the settlement agreement by the Bankruptcy Court, Pepco received a payment of $70 million from Mirant to settle other disputes and pre-petition claims and as reimbursement for legal fees. The $70 million payment must be repaid by Pepco if the Bankruptcy Court approval of the settlement agreement is not upheld on appeal. Therefore, no impact has been recorded to income relating to the receipt of this $70 million payment. •
- While the appeal of the Bankruptcy Court approval of the settlement agreement is pending, litigation continues. On July 19, 2006, the Court of Appeals for the Fifth Circuit issued an opinion affirming the District Court's orders which had been appealed by Mirant. The District Court's orders had denied Mirant's attempt to reject the back-to-back agreement and had directed Mirant to resume making payments to Pepco.
Operations
- Power Delivery electric sales were 14,732 gigawatt hours (GWhs) in the third quarter of 2006 compared to 15,305 GWhs for the same period last year. Cooling degree days decreased by 15% for the three months ended Sept. 30, 2006, compared to the same period in 2005. Weather adjusted electric sales were 14,426 GWhs in the third quarter of 2006 compared to 14,288 GWhs for the same period last year.
- Conectiv Energy's gross margin (defined as revenue less cost of goods sold) on Merchant Generation was $67.2 million in the third quarter of 2006, compared to $100.0 million in the third quarter of 2005. The decrease resulted primarily from lower generation output reflecting milder weather, reduced dispatch of units due to higher oil prices, and an unplanned outage at Hay Road. It is estimated that the Hay Road outage in the third quarter of 2006 reduced Merchant Generation gross margins by approximately $7 million.
- Conectiv Energy's gross margin on Full Requirements Load Service was $10.1 million in the third quarter of 2006, compared to $(11.1) million in the third quarter of 2005. The increase was driven primarily by new, higher margin supply contracts and a mark-to-market gain on a supply contract, which more than offset lower sales. Pepco Energy Services had record high commercial and industrial retail electricity sales of 4,232 GWhs in the third quarter of 2006, compared to 3,743 GWhs in the third quarter of 2005. This increase primarily reflects the acquisition of additional commercial and industrial customer loads.
- Pepco Energy Services' electric load served at Sept. 30, 2006 was 2,955 MW, compared to 2,528 MW at Sept. 30, 2005. This increase primarily reflects the acquisition of additional commercial and industrial load in both existing and new markets.
Regulatory Matters
- On Aug. 17, 2006, Atlantic City Electric entered into an agreement to sell the B.L. England Generating Station to RC Cape May Holdings, LLC for $12.2 million. The sale, which is subject to the receipt of certain regulatory approvals, is expected to close during the first quarter of 2007.
- On Aug. 31, 2006, Delmarva Power filed a gas base rate case in Delaware seeking approval of an annual rate increase of approximately $15.0 million. A decision is expected by March 31, 2007.
- On Sept. 1, 2006, Atlantic City Electric completed the sale of its interests in the Keystone and Conemaugh generating stations to Duquesne Light Holdings Inc. for $177.0 million. Approximately $81.3 million of the net gain from the sale was used to fully offset the remaining deferred balance, which ACE had been recovering in rates, and approximately $51.7 million of the net gain will be returned to ratepayers over a 33-month period as a credit on their bills.
Further details regarding changes in consolidated earnings between 2006 and 2005 can be found in the following schedules.
Special Items
GAAP earnings for the third quarter 2006 include the following special item, which management believes is not representative of the company's ongoing business operations:
- After-tax charges of $7.9 million, or 4 cents per share, related to an impairment loss on certain Pepco Energy Services' assets associated with its energy services business.
GAAP earnings for the third quarter 2005, include the following special items:
- After-tax earnings of $40.7 million, or 22 cents per share, related to the gain associated with the sale by Pepco of the Buzzard Point non-utility land and
- After-tax charges of $8.3 million, or 5 cents per share, related to the increase in income tax expense for the interest accrued on the potential impact of the IRS Revenue Ruling on mixed service costs (IRS Revenue Ruling 2005-53).
GAAP earnings for the nine months ended Sept. 30, 2006, include the following special items:
- After-tax earnings of $7.9 million, or 4 cents per share, related to a gain on Conectiv Energy's disposition of its interest in a co-generation facility and
- After-tax charges of $12.1 million, or 6 cents per share, related to an impairment loss on certain Pepco Energy Services' assets associated with its energy services business.
GAAP earnings for the nine months ended Sept. 30, 2005, include the following special items:
- After-tax earnings of $40.7 million, or 22 cents per share, related to the gain associated with the sale by Pepco of the Buzzard Point non-utility land;
- After-tax charges of $8.3 million, or 5 cents per share, related to the increase in income tax expense for the interest accrued on the potential impact of the IRS Revenue Ruling on mixed service costs (IRS Revenue Ruling 2005-53) and
- After-tax earnings of $5.1 million, or 3 cents per share, related to the Atlantic City Electric base rate case proceedings settlement.
Reconciliation of GAAP Earnings to Earnings Excluding Special Items |
|
| |||
Net Earnings - Millions of dollars | Three Months Ended |
| Nine Months Ended | ||
|
| (Restated) |
|
| (Restated) |
Reported (GAAP) Net Earnings | $104.0 | $168.0 |
| $212.0 | $289.1 |
Special Items: |
|
|
|
|
|
Impairment loss on energy services assets | 7.9 | - |
| 12.1 | - |
Gain on disposition of interest in a co-generation facility | - | - |
| (7.9) | - |
Accrual related to potential impact of | - | 8.3 |
| - | 8.3 |
New Jersey base rate case settlement | - | - |
| - | (5.1) |
Gain on sale of Buzzard Point non-utility land | - | (40.7) |
| - | (40.7) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings, Excluding Special Items | $111.9 | $135.6 |
| $216.2 | $251.6 |
Earnings per Share | Three Months Ended |
| Nine Months Ended | ||
|
| (Restated) |
|
| (Restated) |
Reported (GAAP) Earnings per Share | $0.54 | $0.89 |
| $1.11 | $1.53 |
Special Items: |
|
|
|
|
|
Impairment loss on energy services assets | 0.04 | - |
| 0.06 | - |
Gain on disposition of interest in a co-generation facility | - | - |
| (0.04) | - |
Accrual related to potential impact of | - | 0.05 |
| - | 0.05 |
New Jersey base rate case settlement | - | - |
| - | (0.03) |
Gain on sale of Buzzard Point non-utility land | - | (0.22) |
| - | (0.22) |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share, Excluding Special Items | $0.58 | $0.72 |
| $1.13 | $1.33 |
Pepco Holdings Inc. will host a conference call to discuss third quarter results on Friday, Nov. 3rd at 10:00 a.m. E.S.T. Investors, members of the media and other interested persons may access the conference call on the Internet at http://www.pepcoholdings.com/investors or by calling 1-866-761-0749 before 9:55 a.m. The pass code for the call is 47229843. International callers may access the call by dialing 1-617-614-2707, using the same pass code, 47229843. An on-demand replay will be available for seven days following the call. To hear the replay, dial 1-888-286-8010 and enter pass code 76609518. International callers may access the replay by dialing 1-617-801-6888 and entering the same pass code 76609518. An audio archive will be available at PHI's Web site, http://www.pepcoholdings.com/investors.
Note: If any non-GAAP financial information (as defined by the Securities and Exchange Commission in Regulation G) is used during the quarterly earnings conference call, a presentation of the most directly comparable GAAP measure and a reconciliation of the differences will be available at http://www.pepcoholdings.com/investors.
About PHI: Pepco Holdings, Inc., headquartered in Washington, D.C., delivers electricity and natural gas to about 1.9 million customers in Delaware, the District of Columbia, Maryland, New Jersey and Virginia, through its subsidiaries Pepco, Delmarva Power and Atlantic City Electric. PHI also provides competitive wholesale generation services through Conectiv Energy and retail energy products and services through Pepco Energy Services.
Forward-Looking Statements: Except for historical statements and discussions, the statements in this news release constitute "forward-looking statements" within the meaning of federal securities law. These statements contain management's beliefs based on information currently available to management and on various assumptions concerning future events. Forward-looking statements are not a guarantee of future performance or events. They are subject to a number of uncertainties and other factors, many of which are outside the company's control. Factors that could cause actual results to differ materially from those in the forward-looking statements herein include general economic, business and financing conditions; availability and cost of capital; changes in laws, regulations or regulatory policies; weather conditions; competition; governmental actions; and other presently unknown or unforeseen factors. These uncertainties and factors could cause actual results to differ materially from such statements. PHI disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results and prospects of PHI.
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