Pepco Holdings Reports Second-Quarter 2008 Earnings; Conference Call Scheduled
Monday, August 11, 2008
Pepco Holdings, Inc. (NYSE: POM) today reported second quarter 2008 consolidated earnings of $15.0 million, or 7 cents per share, compared to $57.2 million, or 30 cents per share, in the second quarter of 2007. Excluding special items (as described below), earnings for the second quarter 2008 would have been $107.9 million, or 53 cents per share. There were no special items in the second quarter of 2007. The weighted average number of basic shares outstanding for the second quarter of 2008 was 201.1 million compared to 193.0 million for the second quarter of 2007.
The earnings increase for the second quarter of 2008, excluding special items, as compared to the 2007 quarter was driven by improved performance across the company’s operating businesses. Higher Power Delivery earnings resulted from the impact of the distribution base rate orders issued in Maryland in June 2007 and in the District of Columbia in January 2008, the impact of higher transmission rates, and favorable income tax adjustments, partially offset by higher operation and maintenance expenses. Conectiv Energy realized higher earnings primarily due to higher spark spreads, higher capacity prices, and a mark-to-market gain related to economic coal hedges. Higher Pepco Energy Services earnings were due to a mark-to-market gain related to certain economic hedges of PJM congestion risk, higher generation output, and more favorable congestion costs.
“Our operating businesses performed well across the board in the second quarter reflecting continued progress in the execution of our strategy,” said Dennis R. Wraase, Chairman and Chief Executive Officer. “Power Delivery is seeing the positive impacts of our distribution rate cases and infrastructure investments. Conectiv Energy had another strong quarter as our generating assets capitalized on higher spark spreads and capacity prices. At Pepco Energy Services, we saw 9% electric sales growth reflecting our continued expansion into new markets. For the remainder of 2008, we will remain focused on executing our business plan and building on our strong year-to-date results.” He added, “During the second quarter we took a non-cash charge related to changes in our assessment of our tax position associated with our cross-border energy lease investments. While a charge was taken to comply with the accounting rules, we continue to believe that the tax treatment we applied to these investments was appropriate based on applicable statutes, regulations and case law and we intend to continue to defend vigorously this position.”
For the six months ended June 30, 2008, consolidated earnings were $114.2 million, or 57 cents per share, compared to $108.8 million, or 56 cents per share, for the same period in the prior year. Excluding special items (as described below), earnings for the six months ended June 30, 2008, would have been $207.1 million, or $1.03 per share. There were no special items in the six months ended June 30, 2007. The weighted average number of basic shares outstanding for the six months ended June 30, 2008 was 200.9 million compared to 192.6 million for the same period in the prior year.
The increase in earnings for the six months ended June 30, 2008, excluding special items, compared to earnings for the same period in the prior year was driven by h igher Power Delivery earnings from the impact of the distribution base rate orders in Maryland and the District of Columbia, the impact of higher transmission rates, and favorable income tax adjustments, partially offset by higher operation and maintenance expenses and lower weather related kWh sales. Conectiv Energy realized higher earnings primarily due to opportunities resulting from its generating units’ operating flexibility and dual-fuel capability and its firm natural gas transportation and storage positions, coupled with increasing fuel prices and volatility. Higher capacity prices and mark-to-market gains related to economic fuel and power hedges also contributed to the increase in earnings. Higher Pepco Energy Services earnings were due to more favorable congestion costs, a mark-to-market gain related to certain economic hedges of PJM congestion risk, and increased generation output.
Second-Quarter Highlights
Operations
· Power Delivery electric sales were 12,123 gigawatt hours (GWhs) in the second quarter of 2008 compared to 12,145 GWhs for the same period last year. Heating degree days (electric service territory) decreased by 21% for the three months ended June 30, 2008, compared to the same period in 2007. Cooling degree days (electric service territory) decreased by 3% for the three months ended June 30, 2008, compared to the same period in 2007. Weather-adjusted electric sales were 11,977 GWhs in the second quarter of 2008 compared to 11,816 GWhs for the same period last year.
· Conectiv Energy's gross margin from Merchant Generation and Load Service was $85.0 million in the second quarter of 2008, compared to $51.4 million in the second quarter of 2007. The increase resulted primarily from higher spark spreads, higher capacity prices, and a mark-to-market gain related to economic coal hedges.
· Conectiv Energy's total generation output was 1,094 GWhs in the second quarter of 2008 compared to 1,172 GWhs in the second quarter of 2007. The decrease was driven primarily by lower coal unit dispatch.
· Pepco Energy Services' gross margin from retail energy supply was $36.1 million in the second quarter of 2008, compared to $20.9 million in the second quarter of 2007. The increase resulted primarily from a mark-to-market gain related to certain economic hedges of PJM congestion risk, higher generation output, and more favorable congestion costs.
· Pepco Energy Services had retail electric sales of 4,825 GWhs in the second quarter of 2008, compared to 4,416 GWhs in the second quarter of 2007. This 9% increase primarily reflects additional commercial and industrial customer loads.
Regulatory Matters
· On July 18, 2008, the Maryland Public Service Commission (MPSC) issued an order in connection with Phase II of Pepco’s and Delmarva Power’s distribution base rate cases. The order makes permanent the annual increase in Pepco’s distribution rates of $10.6 million and the annual increase in Delmarva Power’s distribution rates of $14.9 million that were authorized in the Phase I orders issued July 19, 2007. The Phase II order also requires Pepco and Delmarva Power to conduct a management audit of PHI’s Service Company costs for services provided to Pepco and Delmarva Power.
Cross-Border Energy Leases
· In the quarter ended June 30, 2008, PHI recorded a $92.9 million after-tax, non-cash charge to earnings after reassessing the sustainability of its tax position with regard to its cross-border energy lease investments. There are two components to this charge:
· An $86.0 million reduction in the equity value of the cross-border energy leases as the result of a change in assumptions regarding the timing of tax cash flows.
· A $6.9 million non-cash accrual to income tax expense to cover the estimated after-tax interest payment on the potential taxes due as a result of the assumption changes.
The tax payment that would be required based on the assumption changes is approximately $107.4 million plus $10.0 million of after-tax interest. PHI has not made such tax payment to date. Whether PHI makes a payment of this amount, or any amount, will depend on a number of factors including the company’s litigation strategy.
Other
· On June 20, 2008, Pepco, Panda-Brandywine, L.P. (Panda) and Sempra Energy Trading LLC (Sempra) entered into an agreement under which Pepco has agreed to assign its rights and obligations under a power purchase agreement with Panda (Panda PPA) to Sempra in exchange for a payment from Pepco to Sempra. The payment to Sempra will be made from what remains of the payment Pepco received in August 2007 as damages in connection with the Mirant bankruptcy due to Mirant’s rejection of its assumption of Pepco’s obligations under the Panda PPA as part of Mirant’s purchase of Pepco’s generation assets in 2000. The portion of the remaining balance of the funds received in connection with the Mirant bankruptcy that Pepco ultimately retains will depend on the customer sharing arrangements with respect to the funds approved by the MPSC and the District of Columbia Public Service Commission.
Further details regarding changes in consolidated earnings between 2008 and 2007 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-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission, which is available at www.pepcoholdings.com/investors.
Special Items
Management believes the special items shown below are not representative of the company’s ongoing business operations. GAAP earnings for the second quarter of 2008 and the six months ended June 30, 2008 include the following special items (after-tax):
· Charge of $86.0 million, or 43 cents per share, to reflect the impact of a change in assumptions regarding the estimated timing of tax benefits associated with the cross-border energy leases and
· Charge of $6.9 million, or 3 cents per share, to reflect the interest accrued on the income tax obligations from the change in assumptions regarding the estimated timing of tax benefits associated with the cross-border energy leases.
There were no special items for the 2007 periods.
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 second quarter results on Tuesday, Aug. 12 at 10 a.m. E.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 1-800-591-6945 before 9:55 a.m. The pass code for the call is 13280511. International callers may access the call by dialing 1-617-614-4911, using the same pass code, 13280511. 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 98785947. International callers may access the replay by dialing 1-617-801-6888 and entering the same pass code 98785947. 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
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 and New Jersey, 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.
