Pepco Holdings Reports Third-Quarter 2009 Earnings; Conference Call Scheduled
Thursday, October 29, 2009
Pepco Holdings, Inc. (NYSE: POM) today reported third quarter 2009 consolidated earnings of $124 million, or 56 cents per share, compared to $119 million, or 59 cents per share, in the third quarter of 2008. Excluding special items (as described below), earnings for the third quarter of 2009 would have been $97 million, or 44 cents per share. There were no special items in the third quarter of 2008. The weighted average number of basic shares outstanding for the third quarter of 2009 was 221 million compared to 202 million for the third quarter of 2008.
The earnings decrease for the third quarter of 2009, as compared to the 2008 quarter, excluding special items, was driven by lower Power Delivery and Conectiv Energy earnings. The lower Power Delivery earnings were due to higher operation and maintenance expense primarily as the result of increased pension expense and higher interest expense driven by the debt financing completed late last year. The lower Conectiv Energy earnings were primarily due to lower generation output, reduced spark spreads and dark spreads, and the performance of economic fuel hedges. Partially offsetting these decreases were higher earnings at Pepco Energy Services driven by favorable electric supply costs and lower losses on energy derivative contracts.
“During the quarter, the energy markets continued to be challenging,” said Joseph M. Rigby, Chairman, President and Chief Executive Officer. “Generation output was down 16 percent and energy margins were down 57 percent.” Rigby also noted that excluding the increase in pension expense, Power Delivery operation and maintenance expense would have been relatively flat, demonstrating the continued focus on managing controllable costs.
Rigby also cited progress during the third quarter on several key value creation initiatives that the company believes will position it for growth over the longer-term. “We filed two additional distribution rate cases, bringing the total number of cases underway to four, and the District of Columbia Public Service Commission adopted the revenue decoupling mechanism proposed by Pepco. With the implementation of this mechanism in the District of Columbia on Nov. 1, approximately 60 percent of our distribution revenue will be decoupled from electric sales, providing for more predictable utility revenues and aligning the interests of our utilities with those of our customers in terms of energy efficiency programs. I am also very pleased with the recently announced DOE federal stimulus funds award of $168 million, allowing us to accelerate the delivery of Smart Grid benefits to our customers.”
For the nine months ended Sept. 30, 2009, consolidated earnings were $194 million, or 88 cents per share, compared to $233 million, or $1.16 per share, for the same period in the prior year. Excluding special items (as described below), earnings for the nine months ended Sept. 30, 2009, would have been $159 million, or 72 cents per share, compared to $326 million, or $1.62 per share, for the first nine months of 2008. The weighted average number of basic shares outstanding for the nine months ended Sept. 30, 2009 was 220 million compared to 201 million for the same period in the prior year. The decrease in earnings for the nine months ended Sept. 30, 2009, compared to earnings for the same period in the prior year, excluding special items, was driven by essentially the same factors that drove the quarterly results.
Third-Quarter Highlights
Operations
· Power Delivery electric sales were 13,709 gigawatt hours (GWh) in the third quarter of 2009 compared to 14,050 GWh for the same period last year. Cooling degree days (electric service territory) were 11% lower for the three months ended Sept. 30, 2009, compared to the same period in 2008. Weather-adjusted electric sales were 13,782 GWh in the third quarter of 2009 compared to 13,816 GWh for the same period last year.
· Conectiv Energy's gross margin from Merchant Generation and Load Service was $74 million in the third quarter of 2009, compared to $113 million in the third quarter of 2008. The decrease resulted primarily from lower generation output, reduced spark spreads and dark spreads, and the combined performance of economic fuel hedges and default electricity supply contracts. An offsetting factor was higher capacity gross margins.
· Conectiv Energy's total generation output was 1,549 GWh in the third quarter of 2009, compared to 1,851 GWh in the third quarter of 2008. The 16% decrease was due to decreased demand for electricity related to the economic recession and milder weather.
· Pepco Energy Services' gross margin from retail energy supply was $42 million in the third quarter of 2009, compared to $14 million in the third quarter of 2008. The increase was driven by lower electric and gas supply costs, lower losses on energy derivative contracts, lower reliability pricing model (RPM) capacity charges, and higher RPM capacity revenues.
· Pepco Energy Services had retail electric sales of 4,619 GWh in the third quarter of 2009, compared to 5,614 GWh in the third quarter of 2008. This 18% decrease primarily reflects the continuing expiration of existing retail contracts.
Regulatory Matters
· On Sept. 28, the District of Columbia Public Service Commission (DCPSC) approved effective Nov. 1 the revenue decoupling rate structure proposed by Pepco. In connection with the approval, the DCPSC ordered a reduction of 50 basis points to Pepco’s return on equity, reducing the authorized return on equity to 9.5%. On May 22, Pepco filed a distribution base rate case in the District of Columbia. The filing seeks approval of an annual rate increase of $50 million, based on a requested return on equity of 11.25%, which assumed the approval of a revenue decoupling mechanism. A decision is expected from the DCPSC in early 2010.
· On Sept.18, Delmarva Power filed an electric distribution base rate case in Delaware. The filing seeks approval of an annual rate increase of $28 million, based on a requested return on equity of 10.75%. The proposed rate design incorporates the revenue decoupling rate structure as approved in concept by the Delaware Public Service Commission (DPSC). The filing also proposes the use of a three-year average of pension, OPEB, and bad debt expense with recovery through a surcharge mechanism. The difference between the three-year rolling average of the costs and the currently incurred amounts would be deferred for future recovery in the case of an under-recovery, or deferred for future refund to customers in the case of an over-recovery. If approved, the surcharge proposal would lower the requested annual rate increase by $7 million. Delmarva Power intends to put an increase of $2.5 million annually into effect on a temporary basis on Nov. 17, 2009, subject to refund and pending final DPSC approval, which is expected in April 2010.
· On Aug. 14, Atlantic City Electric filed a distribution base rate case in New Jersey. The filing seeks approval of an annual rate increase of $54 million, based on a requested return on equity of 11.50% (if the Bill Stabilization Adjustment mechanism is approved, the requested rate increase would be reduced to $52 million, based on a requested return on equity of 11.25%). The filing also proposes the use of a three-year average of pension, OPEB, and bad debt expense with recovery through a surcharge mechanism. The difference between the three-year rolling average of the costs and the currently incurred amounts would be deferred for future recovery in the case of an under-recovery, or deferred for future refund to customers in the case of an over-recovery. If approved, the surcharge proposal would lower the requested annual rate increase by $8 million.
· In Nov. 2008, Pepco filed proposals with the DCPSC and the Maryland Public Service Commission (MPSC) to share with customers the remaining balance of the proceeds from the Mirant bankruptcy settlement. On March 5, 2009, the DCPSC approved Pepco’s proposal for the sharing of the District of Columbia portion of the proceeds. After giving effect to the sharing arrangement, Pepco recorded a pre-tax gain of $14 million in the first quarter of 2009. On July 2, 2009, the MPSC approved a settlement agreement providing for the sharing of the Maryland portion of the proceeds. As a result, Pepco recorded a pre-tax gain of $26 million in the third quarter of 2009.
Other
· On Oct. 27, 2009, the U.S. Department of Energy announced that Pepco Holdings Inc. was awarded $168 million in federal stimulus funds to help build Smart Grid projects in the District of Columbia, Maryland and New Jersey.
· On Nov. 7, 2008, Pepco Holdings entered into a 364-day credit facility, which has aggregate commitments of $400 million and had a Nov. 6, 2009 termination date. In Oct. 2009, the termination date was extended to Oct. 15, 2010. This credit facility is in addition to the $1.5 billion multi-year credit facility that is in effect until May 2012.
· As noted in the 10-Q, in the last several years, IRS challenges to certain cross-border lease transactions have been the subject of litigation. On October 21, 2009, the U.S. Court of Federal Claims issued a decision in favor of a taxpayer regarding a lease-in lease-out cross border lease transaction. The transaction that is the subject of the ruling is similar in many respects to PHI’s cross border energy lease investments. PHI is currently evaluating the implications of this decision.
· In October 2009, PHI filed a claim with the IRS requesting a Federal income tax refund of approximately $138 million, a substantial portion of which is associated with PHI’s utility subsidiaries. The refund results from the carry back of a 2008 net operating loss for tax reporting purposes that reflected, among other things, significant tax deductions related to accelerated depreciation, the pension plan contributions paid in 2009 (which were deductible for 2008) and the cumulative effect of adopting a new method of tax reporting for certain repairs. The timing of receipt of the refund is uncertain, however, after a 45-day period, interest would begin to accrue on the amount of the refund.
Further details regarding changes in consolidated earnings between 2009 and 2008 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 Sept. 30, 2009 as filed with the Securities and Exchange Commission, which is available at www.pepcoholdings.com/investors.
Reconciliation of GAAP Earnings to Earnings Excluding Special Items
Management believes the special items shown below are not representative of the company’s ongoing business operations.
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 third quarter results on Friday, Oct. 30 at 11:00 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 1-866-700-7441 before 10:55 a.m. The pass code for the call is 45195428. International callers may access the call by dialing 1-617-213-8839, using the same pass code, 45195428. 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 77223380. International callers may access the replay by dialing
1-617-801-6888 and entering the same pass code, 77223380. 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.
