Pepco Holdings Reports Full-Year and Fourth-Quarter 2006 Earnings; Conference Call Scheduled
Thursday, March 01, 2007
Pepco Holdings, Inc. (NYSE: POM) today reported full year 2006 consolidated earnings of $248.3 million, or $1.30 per share, compared to $371.2 million, or $1.96 per share, in 2005. Excluding special items (as described below), earnings for the full year 2006 would have been $254.1 million, or $1.33 per share, compared to $287.8 million, or $1.52 per share, in 2005. The weighted average number of basic shares outstanding in 2006 was 190.6 million compared to 188.9 million in 2005.
The earnings decrease, excluding special items, for the full year 2006 as compared to the prior year was driven by lower Power Delivery kilowatt hour (kWh) sales resulting from milder weather and lower network transmission revenue primarily due to a true-up incorporated in the 2006 transmission rates for rates in effect in 2005. Also contributing to the earnings decrease was a decline in Conectiv Energy earnings due to lower generating output as the result of milder weather, lower spark spreads, and an unplanned outage at the Hay Road generating facility, partially offset by higher earnings from load service contracts, favorable hedge results and higher earnings from the Energy Marketing component of the Conectiv Energy business. The decrease in Power Delivery and Conectiv Energy earnings was partially offset by increased Pepco Energy Services earnings resulting from higher retail sales.
"While the Power Delivery business was negatively impacted by the mild weather in 2006, we made significant progress in executing our regulatory strategy by filing four distribution base rate cases and we continue to make investments to expand and upgrade our transmission and distribution system," said Dennis R. Wraase, Chairman, President and Chief Executive Officer. "Our Competitive Energy businesses performed well in 2006. Despite the mild weather throughout the year, which limited generation output, Conectiv Energy's gross margin came in near the top of its forecasted range. Pepco Energy Services had a strong year with net income from ongoing business operations up 33% driven by increased retail commodity sales. In 2007, we will remain focused on investing in utility infrastructure, achieving constructive outcomes in our rate cases and controlling costs in the Power Delivery business as well as building on the successes of the Competitive Energy businesses."
For the fourth quarter of 2006, consolidated earnings were $36.3 million, or 19 cents per share, compared to $82.1 million, or 43 cents per share, for the fourth quarter of 2005. Excluding special items, earnings for the fourth quarter of 2006 would have been $37.9 million, or 20 cents per share, compared to $36.4 million or 18 cents per share for the same period in 2005. The weighted average number of basic shares outstanding for the fourth quarter of 2006 was 191.5 million compared to 189.5 million for the same period in the prior year.
The increase in earnings, excluding special items, for the fourth quarter of 2006 compared to the same period in 2005 was primarily due to lower Power Delivery operation and maintenance expense, higher Conectiv Energy and Pepco Energy Services earnings, and higher financial investment portfolio results, partially offset by lower Power Delivery kWh sales due to milder weather and lower network transmission revenue primarily due to a true-up incorporated in the 2006 transmission rates for the rates in effect in 2005.
Planning for Future Energy Needs
On Feb. 6, 2007, Delmarva Power filed a comprehensive demand side management and energy efficiency plan in Delaware. Similar filings will be made in Pepco Holdings' other jurisdictions later in 2007. "Looking ahead, our country faces two preeminent energy challenges: the rising cost of energy and the impact of energy use on the environment," said Wraase. "We are taking a proactive stance to help our customers deal with rising energy prices. In addition to our investments in transmission, which should help deliver lower cost generation, and our continued offering of 'green energy' supply, we are proposing a series of programs to enable our customers to better control their energy use and costs and to enhance service reliability." This comprehensive plan includes the automation of the distribution system, which will enable Pepco Holdings' utilities to be more responsive during outages, and ultimately provide better customer service. Integral to this plan is the adoption of Bill Stabilization Adjustment mechanisms that were proposed in the distribution base rate case filings. These mechanisms "de-couple" distribution revenue from sales volume and will result in stable distribution revenue regardless of usage swings related to weather or other factors. "We continue to work collaboratively with legislators and regulators at the state and federal levels, and are taking a leadership role in addressing key energy issues," Wraase added.
Full Year Highlights
Regulatory
• On Aug. 31, 2006, Delmarva Power filed a gas distribution base rate case in Delaware seeking approval of an annual rate increase of $15.0 million. On Feb. 16, 2007, Delmarva Power, the commission staff, and the public advocate filed a settlement agreement with the Delaware Public Service Commission. The settlement provisions include a $9.0 million increase in distribution rates (of which $2.5 million was put into effect on Nov. 1, 2006), a return on equity of 10.25%, a change in depreciation rates that result in a $2.1 million reduction in annual depreciation expense (pre-tax), and participation by all parties in a generic statewide proceeding for the purpose of investigating Bill Stabilization Adjustment mechanisms for electric and gas distribution utilities. A commission decision is expected by the end of March 2007.
• On Nov. 17, 2006, Pepco filed an electric distribution base rate case in Maryland seeking approval of an annual rate increase of $55.7 million without the adoption of a Bill Stabilization Adjustment mechanism or an annual rate increase of $47.4 million with the adoption of a Bill Stabilization Adjustment mechanism. A decision is expected by June 2007.
• On Nov. 17, 2006, Delmarva Power filed an electric distribution base rate case in Maryland seeking approval of an annual rate increase of $20.3 million without the adoption of a Bill Stabilization Adjustment mechanism or an annual rate increase of $18.4 million with the adoption of a Bill Stabilization Adjustment mechanism. A decision is expected by June 2007.
• On Dec. 12, 2006, Pepco filed an electric distribution base rate case in the District of Columbia seeking approval of an annual rate increase of approximately $50.5 million without the adoption of a Bill Stabilization Adjustment mechanism or an annual rate increase of $46.2 million with the adoption of a Bill Stabilization Adjustment mechanism. A decision is expected by Sept. 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, which was subsequently decreased by $1.6 million due to post-closing true-ups. Approximately $81.3 million of the net gain from the sale was used to offset the remaining regulatory asset balance, which ACE had been recovering in rates, and approximately $49.8 million of the net gain is being returned to ratepayers over a 33-month period as a credit on their bills, which began with the October 2006 billing period.
• On Feb. 8, 2007, Atlantic City Electric completed the sale of the B.L. England Generating Station to RC Cape May Holdings, LLC for $9.0 million. The sale price is subject to a 60-day true-up and other adjustments. Net proceeds from the sale will be credited to ratepayers.
Operations
• Pepco, Delmarva Power and Atlantic City Electric each hit a new peak for electric usage in August 2006. Both Pepco and Delmarva Power hit new winter peaks for electric usage in February 2007.
• Pepco Energy Services' retail electric load served at Dec. 31, 2006 was 3,544 MW, compared to 2,034 MW at Dec. 31, 2005. This 74% increase primarily reflects the acquisition of additional commercial and industrial load in both existing and new markets.
• Conectiv Energy's total gross margin in 2006 was near the top of its forecasted range and nearly flat as compared to 2005 (down 1.5%) despite milder weather leading to a 25% decrease in generation output period over period.
Other
• On Aug. 9, 2006, the Bankruptcy Court approved the settlement agreement between Pepco and Mirant arising out of Mirant’s 2003 bankruptcy, which subsequently was affirmed by the U.S. District Court. On Jan. 25, 2007, certain creditors of Mirant filed an appeal of the U.S. District Court’s decision to the U.S. Court of Appeals for the Fifth Circuit.
• Pepco Energy Services announced that it intends to provide notice to PJM of its intention to deactivate its two oil-fired generating facilities. It is expected that the plants would be deactivated by May 31, 2012.
Fourth Quarter Operational Highlights
• Power Delivery electric sales were 11,481 gigawatt hours (GWhs) in the fourth quarter of 2006 compared to 12,293 GWhs for the same period last year. Heating degree days in the electric service territory decreased by 14% for the three months ended Dec. 31, 2006, compared to the same period in 2005.
• Conectiv Energy's gross margin on Merchant Generation and Load Service was $52.1 million in the fourth quarter of 2006, compared to $47.5 million in the fourth quarter of 2005. The increase was due to favorable hedge results, partially offset by lower generating margins driven by lower output.
• Pepco Energy Services had retail commercial and industrial electricity sales of 3,990 GWh in the fourth quarter of 2006, up from retail sales of 2,801 GWh in the fourth quarter of 2005. This 42% increase primarily reflects the acquisition of additional commercial and industrial customer loads.
Fourth Quarter Financing Highlights
• On Dec. 12, 2006, Pepco Holdings issued $200 million of 5.9% unsecured notes due 2016. The net proceeds, plus additional funds, were used to repay a short term bank loan entered into in August 2006 to fund a $300 million maturity of Pepco Holdings long-term debt.
• On Dec. 20, 2006, Delmarva Power issued $100 million of 5.22% unsecured notes due 2016. Proceeds were used to repay short-term debt.
• On January 18, 2007, Delmarva Power redeemed all outstanding shares of its Redeemable Serial Preferred Stock at redemption prices ranging from 103% to 105% of par, for an aggregate redemption amount of $18.9 million.
Further details regarding changes in consolidated earnings between 2006 and 2005 can be found in the following schedules. Additional information regarding financial results and recent regulatory events can be found in the Pepco Holdings, Inc. Form 10-K for the year ended Dec. 31, 2006 as filed with the Securities and Exchange Commission, which is available at www.pepcoholdings.com/investors.
Special Items
GAAP earnings for the fourth quarter 2006 include the following special item (after-tax), which management believes is not representative of the company's ongoing business operations:
• Charges of $1.6 million, or 1 cent per share, related to an impairment loss on certain Pepco Energy Services' assets associated with its energy services business.
GAAP earnings for the fourth quarter 2005, include the following special items (after-tax):
• Earnings of $42.2 million, or 22 cents per share, related to the gain associated with the settlement of the Mirant Transition Power Agreement (TPA) claim and asbestos claim;
• Earnings of $8.9 million, or 5 cents per share, related to the liquidation of a financial investment previously written off;
• Charges of $2.6 million, or 1 cent per share, related to the impairment charge taken by Conectiv Energy to reduce the value of an investment in a jointly-owned generation project; and
• Charges of $2.6 million, or 1 cent 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 full year 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
• Charges of $13.7 million, or 7 cents per share, related to an impairment loss on certain Pepco Energy Services' assets associated with its energy services business.
GAAP earnings for the full year 2005 include the following special items (after-tax):
• Earnings of $42.2 million, or 22 cents per share, related to the gain associated with the settlement of the Mirant TPA claim and asbestos claim;
• Earnings of $40.7 million, or 22 cents per share, related to the gain associated with the sale by Pepco of non-utility land;
• Earnings of $8.9 million, or 4 cents per share, related to the liquidation of a financial investment previously written off;
• Earnings of $5.1 million, or 3 cents per share, related to the Atlantic City Electric base rate case proceedings settlement in New Jersey;
• Charges of $2.6 million, or 1 cent per share, related to the impairment charge taken by Conectiv Energy to reduce the value of an investment in a jointly-owned generation project; and
• Charges of $10.9 million, or 6 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).
Complete press release with selected financial information.
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CONFERENCE CALL FOR INVESTORS
Pepco Holdings, Inc. will host a conference call to discuss fourth quarter results on Friday, March 2 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 1-866-770-7120 before 9:55 a.m. The pass code for the call is 40097562. International callers may access the call by dialing 1-617-213-8065, using the same pass code, 40097562. 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 55424689. International callers may access the replay by dialing 1-617-801-6888 and entering the same pass code 55424689. 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.
