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Pepco Holding, Inc. (NYSE:POM)

Q4 2008 Earnings Call

March 3, 2009 10:00 am ET

Executives

Donna Kinzel – Director of Investor Relations

Dennis R. Wraase – Chairman of the Board & Chief Executive Officer

Joseph M. Rigby – President & Chief Operating Officer

Paul H. Barry – Chief Financial Officer & Senior Vice President

David M. Velazquez – Executive Vice President of PHI & Business Leader Power Delivery

Gary Morsches - President & Chief Executive officer Conectiv Energy

John U. Hoffman – President & Chief Operating Officer Pepco Energy Services, Inc.

Analysts

Paul Patterson – Glenrock Associates

[Kerry St. Louis – Fidelity]

Daniel Eggers – Credit Suisse

[Reese Hudsey – Decade Capital]

Operator

Welcome to the Pepco Holdings fourth quarter 2008 earnings conference call. My name is [Onika] and I will be your operator for today. At this time all participants are in listen only mode. We will have a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. At this time I would now like to turn the call over to Donna Kinzel, Director Investor Relations.

Donna Kinzel

Welcome to the Pepco Holdings fourth quarter 2008 earnings conference call. The primary speakers on today’s call are Dennis Wraase, Chairman; Joe Rigby, President and Chief Executive Officer; and Paul Barry, Senior Vice President and Chief Financial Officer. Also available to answer your questions are Dave Velazquez, Executive Vice President of PHI and the Business Leader of Power Delivery; Gary Morsches, President & Chief Executive Officer Conectiv Energy; and John Huffman, President and Chief Executive Officer of Pepco Energy Services.

Before Dennis begins, let me remind you that some of the comments made during today’s conference call may be considered forward-looking statements. As such they should be taken in the context of the risks and uncertainties disclosed in the Safe Harbor disclosures contained in our Securities & Exchange Commission filings.

Also please note that today’s call will include a discussion of our results excluding certain items that we feel are not representative of the company’s ongoing business operations. These special items and their financial impact are described in our earnings release dated March 2, 2009. The earnings release can be found at www.PepcoHoldings.com/Investors.

Dennis R. Wraase

2008 was a year of both successes and challenges. Each of our operating businesses delivered higher earnings year-over-year. In fact, 2008 marks our strongest financial performance since the formation of Pepco Holdings six years ago. Our results for the year reflect our achievement in several strategic areas. We capitalized on market conditions that aligned with Conectiv Energy’s business model and we realized the positive impacts of our distribution rate cases and power delivery.

While our financial performance for the year was strong, like other companies we were faced with operating in a deteriorating economic environment and severely volatile financial market. Given the economy and the state of the markets we expect to face challenges in 2009. However, we remain optimistic about our longer term growth prospects. In 2008 we advanced key projects such as the Mid Atlantic Power Pathway, our blueprint for the future program and the construction of two new power plants at Conectiv Energy.

As we evaluated the turmoil in the financial markets in late 2008, we viewed capital market access in 2009 as uncertain. In the fourth quarter we were proactive in reducing financing risk by completing over $1 billion of debt and equity financing. We believe completing this financing was prudent given the uncertain economy and positions us to continue the implementation of our construction plans in 2009.

Our most recent actions will place PCI in good financial and operating position as we move ahead. Let me briefly comment on the future. Last week we announced a series of executive management changes. As many of you know I will be retiring after our May annual meeting. I’m very pleased with our executive transition process and I am proud of the progress we have made during my tenure. We faced many challenges and I believe we have delivered on our commitments.

I am confident that the team will continue to deliver value for our investors, customers and employees. Joe and I have worked closely together over the past six years and I am confident in his ability to lead this organization. With that, let me turn the call over to Joe.

Joseph M. Rigby

I’m extremely excited to take on this new role and I’m looking forward to lead the team as we continue to great value. Let me begin by recapping our most recent financial performance. Consolidated earnings for the year were $300 million compared to $334 million in 2007. In the second quarter of 2008 we took charges to earnings totaling $93 million due to a change in our assessment of our tax position associated with our cross border energy lease investment.

In 2007 we recognized gains for the Mirant bankruptcy damage claim settlement and the Maryland income tax settlement. We view these items as not being representative of the company’s ongoing business operations. Excluding these special items earnings for 2008 would have been $393 million compared to $296 million in 2007. Paul will discuss the financial results and our operating segment performance in more detail including the results for the fourth quarter but first I’ll address some topics of interest.

As Dennis mentioned, we reached key milestones for several significant projects that will provide long term growth for PHI and benefits for our customers. In October the Federal Energy Regulatory Commission unanimously improved incentives related to our Mid Atlantic Power Pathway or MAPP project. These incentives include rate based treatment of construction work in progress, a return on equity at 150 basis points resulting in an authorized return on equity of 12.8% and the recovery of prudently incurred costs in the event of project cancellation.

In December PJM Interconnection’s board of managers approved the use of direct current cabling for a portion of the project. The revised estimated construction cost of the line is $1.4 billion up from the previous estimate of $1 billion. And, just a few weeks ago we received authorization from the Maryland Public Service Commission to use an existing certificate of public convenience and necessity for the chalk point station segment of the line. Construction of this segment is scheduled to begin late this year.

During 2009 we will continue to seek the remaining required certificates of public convenience and necessity as well as the required environmental approval for the Maryland portions of the line and the projection completion date remains 2013. Our blueprint for the future initiatives also made significant progress in 2008. Most notably in September the Delaware Public Service Commission approved the application of advanced meter infrastructure or AMI technology across the distribution system. A regulatory asset will created to ensure recovery of and return on AMI related costs between rate cases. Due to Delaware’s constructive regulatory action we will first provide the benefits of AMI to our Delaware customers with meter installation expected to begin in late 2009.

In the District of Columbia, a smart meter pilot is underway and filings proposing similar pilot programs in Maryland and New Jersey are pending. Also of not is our recent selection of Silver Spring network as the provider of networking infrastructure, devices, software and a variety of services necessary to support our blueprint initiatives. I’m also pleased at both the Maryland and District of Columbia Commissions have approved several demand response and energy efficiency programs which will help our customers reduce energy costs. The cost of these programs will be recovered through surcharge mechanisms.

Our blueprint initiatives continue to make steady progress. These programs and investments enable us to do our part to create a cleaner environment and allow our customers to better manage their energy usage in an effort to reduce the energy portion of the bill. We believe that we have already seen some efforts by our customers to conserve in light of the weak economy. In 2008 customer growth was almost 1% while weather adjusted kilowatt hour sales were down almost .5% as compared to 2007.

A portion of the impact of the lower sales was offset by the revenue decoupling mechanism we have in place in Maryland demonstrating the effectiveness of this rate design. Looking forward we expect recessionary pressures on the economy and the ongoing energy efficiency and conservation efforts to continue to affect demand in the near term. In fact, we expect sales to be essentially flat in 2009. Given this view we are encouraged by the progress we are making in advancing our decoupling initiatives in our other regulatory jurisdictions.

In September the Delaware Commission issued an order approving the concept of revenue decoupling rate structure for Delaware Utilities including Delmarva Power. The specifics of the rate design will be determined in the next base rate proceeding which is currently scheduled for the third quarter of 2009. In the District of Columbia the Commission supported the concept of the bill stabilization mechanism in its January, 2008 order and testers base rate case.

Since then the Commission has determined that it has the necessary statutory authority to implement decoupling and has scheduled hearings for mid May. A revenue decoupling mechanism is also under consideration in New Jersey. As a result of the implementation in Maryland, approximately 40% of PHI’s total distribution revenue is decoupled from consumption. Approval in Delaware and the District of Columbia would increase the percentage to approximately 75%.

Before I leave the topics of MAPP and blueprint I would like to discuss our pursuit of federally backed funds for a portion of the cost of these projects. Last week we submitted an application to the US Department of Energy under Title XVII of the Energy Policy Act of 2005. Our application seeks low cost debt financing for approximately 50% of the planned MAPP expenditures under the federal loan guarantee program and we expect a decision on our application late this year.

The American Recovery and Reinvestment Act of 2009 may provide for additional federal funding in partnership with the governments of the District of Columbia and the states we serve. These funds could become available to jumpstart several ready projects within our MAPP and blueprint initiative. The federal government’s goals dovetail well with our smart grid and infrastructure plan and we are actively working to secure a portion of these funds to more quickly create green jobs, improve reliability and promote energy independence in our region.

As we have previously indicated, 2009 will continue to be a busy year on the regulatory front with four rate cases currently planned. In the second quarter Pepco expects to file a distribution base rate case in the District of Columbia and Delmarva Power expects to file a case in Maryland. In the second half of the year Delmarva Power plans to file an electric distribution base rate case in Delaware and Atlantic City Electric plans to file a case in New Jersey.

We are currently monitoring the Maryland legislative session which runs through April 13th. Over the past few weeks several bills have been proposed which call for various forms of reregulation. Yesterday, Governor O’Malley of Maryland also announced the introduction of legislation for reregulation. Key aspects of this proposed legislation include directing the Maryland Public Service Commission to play a decision making role in the construction of new power plants and determining when new energy generation is needed.

While it’s not possible to predict the outcome of this matter, we do expect this issue to be front and center for the remainder of the session. We have been extremely active in promoting programs which help our customers better manage their energy needs and improve our environment while maintaining the financial integrity of the utility. In our view it is essential to approach the subject of reregulation in a careful and thoughtful manner and we welcome the opportunity to engage in a productive dialog to shape Maryland’s energy future.

Now, I’ll turn to our competitive businesses. Conectiv Energy continues to provide earnings diversification and incremental growth opportunities to compliment our power delivery business. Conectiv Energy had a very good year in 2008 earning a total gross margin of $407 million. This was at the midpoint of its forecasted range and is an increase of 28% over last year despite lower generation output.

Construction of Conectiv Energy’s new power plants at the Delta and Cumberland sites continues to proceed on schedule and within budget. The Cumberland project is nearing completion and is expected to be put in to service during the second quarter of 2009. The Delta project is expected to become operational during the second quarter of 2011. These additions to Conectiv’s fleet will enhance its value while providing needed capacity in the PJM region.

Last month Conectiv announced a partnership to develop a four megawatt photovoltaic solar power generating facility located in Vineland New Jersey. The Vineland municipal electrical utility will take all the power from the facility through a long term power purchase agreement. Conectiv Energy will retain the solar renewable energy credits produced by the project to use for the load they serve in New Jersey as a result of BGS auction process.

[SMECO] Energy Services is also benefiting from the increased interest in renewable energy as well as energy efficiency. In December PES completed installing one of the largest single roof mounted solar energy projects in the United States to supply power to the Atlantic City Convention Center in New Jersey. Also in December PES was one of the select group of energy services companies awarded a Master performance contract by the US Department of Energy.

The award was based on Pepco Energy Services demonstrated capabilities to provide energy projects to federal agencies. Having this contract in place gives PES the opportunity to bid on energy projects for federal facilities that arise. In 2008 approximately $0.08 per share of PES’ earnings came from the energy services portion of the business.

Over the past several months we have been conducting a strategic analysis of the retail energy supply portion of Pepco Energy Services’ business. This review has included among other things the evaluation of potential alternative supply arrangements to reduce collateral requirements or possible restructuring, sale or wind down of the business. Among the factors being considered is to PHI earns by investing capital in to retail energy supply business as compared to alternative investments.

We expect the retail energy supply business to remain profitable based on its existing contract backlog and the margins that have been locked in with corresponding wholesale energy purchase contracts. However, as we factor in through the retail pricing the increased cost of capital we have been experiencing reduced retail customer retention levels and reduced levels of new retail customer acquisition.

At this point let me turn it over to Paul Barry.

Paul H. Barry

I hope you’ve had a chance to review our earnings release. I’ll go through some of the highlights and provide some additional detail. We’ll then open the call to your questions. First, I’ll recap our consolidated earnings and then I’ll address our performance by operating segment. Consolidated earnings in 2008 were $300 million or $1.47 per share compared to $334 million or $1.72 per share in 2007.

Excluding the special items that Joe referred to, earnings would have been $393 million or $1.93 per share in 2008 compared to $296 million or $1.53 per share in 2007. Dilution primarily from our November 2008 stock offering impacted earnings per share by $0.07. Consolidated earnings for the fourth quarter were $67 million or $0.32 per share compared to $57 million or $0.29 per share for the fourth quarter of last year. There were no special items in either period.

For the power delivery operating segment, earnings in 2008 were $1.23 per share compared to $1.20 per share in 2007. Excluding special items in 2007, earnings would have been $1.01 per share. The effective dilution negatively impacted earnings per share by $0.06 in 2008. The biggest drivers of the year-over-year increase were the Maryland distribution rate orders for Pepco and Delmarva Power effective in June 2007 and the District of Columbia distribution rate order for Pepco effective February 2008.

The orders drove higher revenue of $0.16 per share and in the case of the Maryland orders, lower depreciation of $0.03 per share as compared to the prior year. The two other significant positive factors year-over-year were higher transmission revenue of $0.08 per share and $0.12 in income tax adjustments that were primarily related to interest associated with uncertain tax positions. In 2008 we experienced lower weather related sales versus the prior year which resulted in earnings decrease of $0.05 per share year-over-year.

Cooling degree days were down 10% and heating degree days were down 2%. The weather had no impact on earnings when compared to normal weather. Keep in mind that approximately 40% of our distribution revenue is currently decoupled from consumption. Early last year we set a target of $691 million for 2008 power delivery operation and maintenance expense. For the year power deliver O&M expense came in at $702 million including an $11 million increase in bad debt expense year-over-year.

Of this increase in bad debt expense about $5 million is expensed with the balance deferred for future recovery. We are pleased with the management of O&M expenses during the year especially in the fourth quarter where lower operation and maintenance expense increased earnings by $0.04 quarter-over-quarter. We will provide a projection of 2009 utility O&M expenses at our upcoming analyst conference.

For the fourth quarter power delivery earnings were $0.24 per share compared to $0.15 per share for the 2007 period. The biggest factors that increased earnings period-over-period were the impact of the District of Columbia distribution rate order, the benefit of income tax adjustments and the lower operation and maintenance expense which I previously mentioned.

Conectiv Energy had strong results for the year. Conectiv Energy’s 2008 earnings were $0.60 per share compared to $0.38 per share in 2007. The effective dilution negatively impacted earnings per share by $0.03 in 2008. Conectiv’s results are due in part to the operational and fuel flexibility we built in to our portfolio of assets. Our continued optimization of these assets combined with favorable market conditions drove about $0.11per share of the improvement year-over-year.

Higher capacity prices net of hedges also favorably impacted gross margin in 2008 by about $0.14 per share versus 2007 and about $0.05 per share of this increase is due to mark-to-market gains related to economic coal hedges. A partially offsetting factor is a decrease in earnings per share of about $0.04 due to lower sales emission allowances. Also worth noting is that in the fourth quarter Conectiv Energy recorded a lower cost to market adjustment to oil inventory held at the power plants caused by the significant declines in oil prices during the fourth quarter.

The adjustment negative impacted earnings by about $0.04 per share. As Joe mentioned, Conectiv Energy’s gross margin came in at the midpoint of its forecasted range for 2008. We intend to provide the forecasted gross margin ranges for 2009, 2010 and 2011 at our upcoming analyst conference. For the fourth quarter Conectiv Energy’s earnings were $0.02 per share compared to $0.08 per share for the same period last year. The earnings decrease quarter-over-quarter was due to a 53% decrease in generation output, lower energy spark spreads and the lower cost to market adjustment for oil inventory partially offset by higher capacity prices and the benefit of income tax adjustments.

Pepco Energy Services 2008 earnings were $0.19 per share compared to $0.20 per share in 2007. The dilution impact was $0.01 per share. Earnings from the retail energy supply business were up year-over-year due to higher gas delivery volumes, lower gas supply costs and more favorable congestion costs in the electric businesses. These increases were partially offset by the higher cost of supply in the electric business and capacity related charges associated with power generation.

For the fourth quarter Pepco Energy Services earnings were $0.05 per share compared to $0.08 per share in 2007. The earnings decrease was driven by higher capacity related charges associated with power generation and higher operation and maintenance expenses. As Dennis mentioned, we completed over $1 billion of financing in the capital markets during the fourth quarter of 2008.

In early November we issued common stock for net proceeds of $255 million. The stock offering was followed by first mortgage bond offerings at each of our three utilities for the size of $350 million apiece. In November, we also entered in to a 364 day credit facility with nine banks which has aggregate commitments of $400 million. Note that this credit facility is an addition to the $1.5 billion credit facility that is in effect until May of 2012. This financing activity strengthens our liquidity position and better positions us as we execute our business plan in 2009. On December 31st Pepco Holding and its subsidiaries had $1.5 billion in cash and credit facility capacity available.

Finally, I would like to address our expectations for pension expense and funding. The stock market declines in 2008 caused a decrease in the market value of our benefit plan assets. While the negative return did not have an impact on PHI’s earnings in 2008 the reduction in assets will result in an increased pension and post retirement benefit cost in 2009 and possibly future years. We estimate the pension expense to be approximately $85 million in 2009 compared to $24 million in 2008.

Historically about 70% of our pension expense is reflected in our operating results with the balance charged to capital. We expect to incorporate this higher cost in our upcoming rate case filings. Additionally, although we project there will be no minimum funding requirement in 2009 under the pension protection act, in accordance with our policy we plan to make a discretionary tax deductable contribution in 2009 of approximately $300 million to bring the plan assets to at least the full funding level under the pension protection act. The utilities subsidiaries will be responsible for funding approximately 80% of this contribution. We made no contribution to the pension plan in 2008.

In closing we are pleased with our performance in 2008. We continued to deliver on our commitments and the long term fundamentals of our business remain strong. While we expect to face challenges in 2009 we believe we are positioned for longer term earnings growth. We continue to demonstrate the effectiveness in the regulatory area and we have construction programs that is heavily focused on transmission and distribution liability projects. And, we continue to focus on executing our business plan.

With that, we would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

The 2009 tax rate, what should we think about in terms of that?

Joseph M. Rigby

I think that a more representative number is probably in the 40% range. You may note that we had a fairly significant impact in the fourth quarter with some adjustments that we would consider to be of the non-recurring nature. So, I think on a go forward basis 40% is probably a realistic number to use.

Paul Patterson – Glenrock Associates

Then the MAPP it was sort of interesting it looks like you guys are going to have higher cap ex at MAPP yet when I compare it to the EI presentation it looks like you guys are deferring some of that expense in to the future. Am I right about that?

Joseph M. Rigby

What’s happening there Paul is that when we met with you guys back in November we had indicated that for ’09 we were projecting about a 20% to 25% reduction if you will. I think for 2009 it’s probably going to be closer to like a 17% reduction. Some of that is just related to timing of MAPP. The big increase in MAPP related to the direct current cabling is really not going to impact us in ’09, more likely the later part of ’10 and ’11 so you won’t see the impact of that.

We also had some – as we recast our cap ex from a timing point of view on blueprint we saw that given the regulatory landscape we could push some of those dollars out. What pushed our overall cap ex up a little bit is an acceleration of some spending related to Delta. So, all in you’re probably still looking at a reduced cap ex in 2009 of north of $150 million.

Paul Patterson – Glenrock Associates

Then with the PES review first of all I mean if the cost of capital that you’re putting in to your pricing is causing lower retention rates and customers switching what have you, where are they going to? Are they going to other suppliers? Just what is the customer behavior in that situation?

Joseph M. Rigby

We have John Hoffman here Paul, I think he can respond to that.

John U. Hoffman

Essentially they’re going to our competitors. We started pricing what we feel is an appropriate cost of capital in to our proposals starting back in October and we have seen a decrease in our ability to win business as well as retain customers. So, we’re seeing our competition not taking the same measures that we’ve taken and thus our customers have gone to our competitors.

Paul Patterson – Glenrock Associates

How much capital does that business take up? I mean when we think about collateral requirements and everything what should we think about? If you were to discontinue that business, wind it down what have you, what would be the capital impact?

Paul H. Barry

I mean we disclosed the amount of liquidity that we have available to the business for both commercial businesses, both Conectiv Energy as well as Pepco Energy Services and actually showed it for January and February. Actually, the lowest point for that period we had about $378 million of both cash and borrowing capacity available to those businesses. But, in addition we had almost $700 million at the utility level so roughly $1.1 billion of total liquidity available of corporate liquidity.

Paul Patterson – Glenrock Associates

I guess what I’m wondering though is if the PES business which you guys are reviewing right now, if you guys were to get rid of it besides the proceeds if you were to sell it or whatever, if it were to wind down, I’m wondering how much cash would that free up? Do you see what I’m saying? In other words you guys are saying the collateral required and the capital cost associated with this business have gotten higher, I’m wondering what the impact would be in fact if you got rid of it?

John U. Hoffman

The working capital that we have invested in that business is roughly in the $100 million range. That would come back in addition to whatever collateral we have outstanding with our suppliers, that would come back as well.

Paul Patterson – Glenrock Associates

Then just finally the equity needs for 2009, or just generally speaking what should we think about in terms of financing in 2009 considering sort of the challenges you guys are facing and just the pension what have you? What should we be thinking about in terms of you guys coming back to the market?

Paul H. Barry

We have no financing needs for what I would call new money. We are actually looking in to doing a refinancing if you will of some tax exempt option reset bonds we have that we bought back that we will reissue. We have no plans this year – we accelerate an equity issue as you know last November that we had planned for 2009 so basically we did all the financing that we needed to do last year.

We have a small $50 million debt reduction this year which is done. So basically unless we see the need to do something on an accelerated basis because the markets are attractive. But, at the moment we have no financing plans for this year.

Operator

Your next question comes from [Kerry St. Louis – Fidelity].

[Kerry St. Louis – Fidelity]

Some of my questions have been answered but I just wanted to go over a couple of things. You said that at the low point for liquidity between yearend and now it was about $1.1 billion?

Paul H. Barry

On a consolidated basis.

[Kerry St. Louis – Fidelity]

Can you tell me where you are today or where you have numbers as of most recently? Like, when was that low point and where are you currently?

Paul H. Barry

We don’t really disclose that [Kerry] but for the month of January and February $1.1 was the consolidated liquidity both cash and credit capacity that was available for that period.

[Kerry St. Louis – Fidelity]

So you just also said if I just heard correctly no expected debt issuance this year except in the tax exempt market?

Paul H. Barry

Right. It’s really a refinancing, issuing debt that we bought back and reissuing it.

[Kerry St. Louis – Fidelity]

Even with this pension funding of $300 million, that’s still the expectation?

Paul H. Barry

Yes. Obviously, that’s the pre-tax amount so we would expect to find that with internally generated cash flow.

[Kerry St. Louis – Fidelity]

You said in the K about the review of PES, that’s been ongoing for some time, when is the anticipated resolution of that expected?

Joseph M. Rigby

I think it would be difficult for us to say when an absolute expected resolution date but, I think you could certainly expect that we’re going to be discussing the latest on it at the March analyst meeting.

[Kerry St. Louis – Fidelity]

Because I’m assuming when you come out is it just going to be like, “Well, we’re going to sell it.” Or, you’ll have a definitive answer like, “We decided we were going to sell it and here’s the buyer.”

Joseph M. Rigby

We’ll give you a definitive answer when we have a definitive answer.

[Kerry St. Louis – Fidelity]

Then lastly, I heard you mention the percentage of revenues decoupled, can you just repeat that I didn’t catch it?

Joseph M. Rigby

On what’s currently covered under decoupling specifically in the state of Maryland, it’s 40% of our distribution sales. If you factor in hopefully a good outcome in Delaware and DC it would go up 75%. I also think we commented in the K that the impact in 2008 was approximately $24 million of revenue that was derived from the decoupling mechanism so you can see it does have a significant impact on an annual basis.

[Kerry St. Louis – Fidelity]

Then lastly, I saw I think it said I think it was operating income from unregulated is down to about 20% now, is that kind of where you expect it to stay?

Joseph M. Rigby

Well, we have to probably get back to you on that one [Kerry]. We’ll circle back.

[Kerry St. Louis – Fidelity]

But I guess the trend has been declining, operating income from unregulated as a percentage. It looks like it has been declining?

Joseph M. Rigby

I’m sorry I misunderstood your question. No, we still think that it’s still worth talking about a 70/30 split here. I apologize, I misunderstood your question.

Operator

Your next question comes from Daniel Eggers – Credit Suisse.

Daniel Eggers – Credit Suisse

I’m looking at the collateral, the liquidity you guys had at competitive businesses in January and February between $378 and $757. Then I look at the $462 million of collateral that would be required if the company was moved to below investment grade. I know PES is getting smaller but how are you guys balancing potential postings of the downgrade relative to the collateral competitive businesses?

Joseph M. Rigby

First off, we would subscribe a very low probability to a downgrade. Our intention with this disclosure was to be as informative as we could be but we would subscribe a very low probability that – we’ve not had any commentary from the agencies so it’s hard for me to really put some number relative to your question.

Daniel Eggers – Credit Suisse

The $462, help me understand how much of that is utility related collateral obligations relative to parent and competitive business collateral obligations?

Joseph M. Rigby

Dan, we have not previously disclosed that.

Daniel Eggers – Credit Suisse

As you guys have brought down the size of the competitive business, the $378 the highest point when I look at the available liquidity, I assume that that number is getting smaller as the business gets smaller, is that fair?

Joseph M. Rigby

That would be the case yes.

Daniel Eggers – Credit Suisse

How are you guys thinking about the amount of cushion you need?

Joseph M. Rigby

Dan, the amount of collateral that’s being drawn is getting smaller which in fact pushes the $378 higher.

Paul H. Barry

$378 is liquidity both cash and borrowing capacity for the commercial business alone. Then obviously we’ve got $673 million of utility subsidiary liquidity. So, corporate [inaudible] $1.1 billion which was the lowest mark and actually the highest mark for those first two months was about $1.8 billion.

Daniel Eggers – Credit Suisse

I guess I was just thinking about the competitive business and kind of the isolation of collateral in that business. How much cushion you guys need and whether the $378 low, whether you deem that as being too low and if that’s factoring in to how you’re approaching the strategic review of PES.

Joseph M. Rigby

Let me just say that we believe we have an adequate amount of liquidity. The strategic review we’re doing with regard to PES is as we mentioned, something we’ve been thinking about actually going back to our conversations back in November. As we kind of saw this coming we began to factor in the cost of capital which John commented a couple of minutes ago is causing the reduced retention and acquisition. The real fundamental issue here is that the company that is fundamentally focused on C&D we evaluate this draw of our capital relative to our investments in utility. So, as we kind of think through our future, that’s really going to be the determining factor for us, factoring that type of collateral requirement for PES against what is really the core business.

Daniel Eggers – Credit Suisse

Is there a size were PES gets too small to run? So, if you start bringing it in because returns aren’t high enough, is there a point where kind of the overhead and the attention that goes in to the business becomes too great relative to the size of contribution to Pepco?

Joseph M. Rigby

In all likelihood and that’s one of the reasons why we consider an alternative to just be the ultimate wind down. But, just to be clear, we’re talking just about the retail energy piece, the energy services piece, the ESCO piece of the business that we foresee in our future.

Daniel Eggers – Credit Suisse

Can you keep the ESCO business going without the retail supply business also?

Joseph M. Rigby

Absolutely.

Daniel Eggers – Credit Suisse

I don’t mean to take up too many questions but just my last one, Conectiv's gross margin range has kind of given some of the pressure both with load pressures and PJM but also the fallen commodity prices, are you guys going to update those at the analyst day?

Paul H. Barry

That’s correct.

Operator

Your next question comes from [Reese Hudsey – Decade Capital].

[Reese Hudsey – Decade Capital]

Could you please give us an update on the lease, the tax payment due to the leases? Could that be a factor in 2009 or when do you expect that to be resolved?

Joseph M. Rigby

There’s really no change to our position from our last call. It’s really very difficult to estimate but I think our basic view is this could still take quite a bit of time to work its way through a resolution.

[Reese Hudsey – Decade Capital]

So unlikely to resolve itself in 2009, is that a fair assumption?

Joseph M. Rigby

I think that’s a fair assumption.

[Reese Hudsey – Decade Capital]

You talked about PES a little bit, does any of these issues revolving around PES affect the energy marketing business at Conectiv?

Joseph M. Rigby

No.

[Reese Hudsey – Decade Capital]

So that’s safe?

Joseph M. Rigby

That’s correct.

[Reese Hudsey – Decade Capital]

And you mentioned the ESCO business at PES, how much of the total earnings of the PES total earnings?

Joseph M. Rigby

We derived $0.08 per share in 2008 from that part of the business.

[Reese Hudsey – Decade Capital]

And remind me what was total PES earnings in 2008?

Joseph M. Rigby

$0.20.

Operator

At this time there are no additional questions. I would now like to turn the call back over to Joe Rigby, Chief Executive Officer for closing remarks.

Joseph M. Rigby

I’d like to close the call by just taking a moment to recognize Dennis for his leadership in guiding the company over the past five years. I think as most of you know he’s been the primary architect of our blueprint for the future and I know we’re going to benefit from his vision as we move forward. I’d also like to extend an invitation to the analysts on the call to join us on March 26th and 27th here in Washington for our annual analyst conference. If you have not received an invitation please contact our investor relations staff. At the conference the executive team will discuss our strategic plans and provide a detailed review of the businesses and I hope you will be able to join us. Thank you all for joining us today.

Operator

Ladies and gentlemen this concludes the presentation. You may now disconnect. Thank you and have a good day.

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Source: Pepco Holding, Inc. Q4 2008 Earnings Call Transcript
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