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Pepco Holdings, Inc. (NYSE:POM)

March 14, 2013 9:00 am ET

Executives

Frederick J. Boyle - Chief Financial Officer and Senior Vice President

Joseph M. Rigby - Chairman, Chief Executive Officer, President and Member of Executive Committee

David M. Velazquez - Executive Vice President, Chief Executive Officer of Potomac Electric Power Company, Chief Executive Officer of Delmarva Power & Light Company, Chief Executive Officer of Atlantic City Electric Company, President of Potomac Electric Power Company, President of Delmarva Power & Light Company and President of Atlantic City Electric Company

John U. Huffman - Chief Executive Officer of Pepco Energy Services Inc and President of Pepco Energy Services Inc

Analysts

Noah Hauser - Barclays Capital, Research Division

Maurice E. May - Power Insights

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Frederick J. Boyle

Good morning, everyone. Thank you for coming today, and thank you for those that are listening to us on the webcast. I'm Fred Boyle, the Senior Vice President, Chief Financial Officer for Pepco Holdings. We're very excited to be here today, give us a chance to tell you our story in person versus just through reading it through books.

With me today -- well, first of all, let me cover the Safe Harbor statement. Can't have any presentation without the Safe Harbor statement. So just to let you know, there's forward-looking information, and be wary of it.

So now today's agenda, you see here, and the list of speakers are shown, and this is in your book also. So with me today is Joe Rigby, the Chief Executive Officer; Dave Velazquez, Executive Vice President for Power Delivery; John Huffman, President and Chief Executive Officer for Pepco Energy Services.

As far as Q&A, we'll have Q&A after each of the speakers, except for Joe, upfront. And then we'll -- at the end, we'll have Q&A, and Joe can contribute anywhere he pleases as we move through this. So with that, let me turn it over to Joe.

Joseph M. Rigby

Thanks, Fred. Good morning, everyone. I appreciate you all being here. I appreciate the opportunity to come to you this year. I also want to say thanks to my team not only for the preparation of the materials that we're going to go through with you today but also for just the really hard work over the last 12 months. We think we've made some real progress here.

My comments are going to, hopefully, be fairly focused today because I think that the strategy is very focused. And I think the theme that we'll try to communicate to you is one of how focused we are on the execution of the plan. I know probably at the top of that list and probably at the top of your list of interest is where do we stand on the regulatory front, so we're going to spend a lot of our time talking about that today.

This next slide, for -- particularly for those of you who follow us, should be fairly familiar. It gives you the components of what PHI is. I'm really pleased with the operational improvement across the Power Delivery business. When you think about the core of the business, our ability to make headway on the regulatory front, is only going to come to the extent that we're executing our improvement plan, and then the fact that our customers are satisfied, meeting their expectations. And Dave Velazquez is going to cover that information in great detail today. He's going to talk about the focus we have on the infrastructure investment, the $5.9 billion that we intend to spend, and the progress we've made across every part of our service territory in achieving and moving towards the path of operational excellence.

We're making great progress in implementing the Smart Grid, and we'll talk about that. And then again, kind of the mantra you're going to hear us talk about is the need to have reasonable regulatory outcomes. That's obviously a big key for us.

John Huffman is going to give you an update on Pepco Energy Services. Candidly, PES had a tough year in 2012. Market grew soft. We went through 2 separate steps to rightsize the cost structure of the business, such that we position it to be profitable in 2013, but also looking for the market to rebound because we do believe in the business. It's not a business that consumes a lot of capital, if any, and it's one that we have a deep level of experience in.

I'm very, very pleased, and I'm going to spend a little bit of time talking about the progress we've made and why I feel so confident about where the company is and where it's going. You're going -- Dave is going to talk to you about the operational plan. And we're basically in the third year of a significant investment phase we call the Reliability Enhancement Plan, but also importantly, looking at our processes around storm restoration. And for all of us in this part of the country, you can understand that the grades are really made in those types of events. And we actually had a very good, strong performance in 2012. Our improvement in reliability includes a 24% reduction in the frequency of outages, a 26% reduction in the duration, and they are really strong metrics and really positioning us to not only meet, but in some cases, we're actually exceeding the reliability standards in the service territories we have.

We had 2 very significant tests in 2012. We had the derecho, I don't think anybody in this room probably had ever heard that word before. That came through in the late June, but it was a very significant challenge for us. From where I sit, from an operational point of view, it was the finest restoration effort in the history of the company. And -- but even having said that, there was a significant level of criticism, which I think did bleed into -- impact on the regulatory front, particularly for Pepco in the summer. But Hurricane Sandy, across the service territory, the company received very, very strong grades. And that, along with all the work that we've been doing in -- on the normal blue sky days, has led to a fairly significant uptick in customer satisfaction. And again, tying these points together, having the strong operational performance, having satisfied customers really enables us to go in and have a much more constructive dialogue with our regulators. We spend a lot of time, much more so than we did maybe 5, 6 years ago, maintaining that dialogue, having direct contact to the governors, to the mayors, whether it's working on the Grid Resiliency Task Force or my own involvement in D.C. on the undergrounding task force, talking to these decision makers with regard to how PHI can be helpful to them, in support of them and their energy policies but all the time, drawing them back to the criticality that, as we are making this investment, as we are building tax base, as we are providing employment, that we need to have reasonable regulatory outcomes for us to continue to do that. And that's a very, very significant part of how I spend my time.

I feel good about the financial performance in 2012. We ended up well in our earnings range. I think that the other thing that I would just mention, maybe somewhat behind the scenes but also out in the front, is that in this -- I'm sure you're all aware of this, the world's become very, very politicized. And part of the capacity and the capability that we had to build was more -- was also on the communication front. And we've really totally revamped that team. So before, during and after we have these events, we're much more proactive, we're much more nimble. The outreach is almost instantaneous to provide information to these decision makers, political leaders, regulatory leaders, such that we position the company as being out in front of the event, being very, very responsive, and that's working certainly to our advantage.

And a big part of my job is to prepare the company for the future and making sure that we have a strong team in place. Certainly, during 2012, Tony Kamerick was reaching the end of his career. We were very pleased to bring someone like Fred Boyle in. Our General Counsel would actually be -- or our prior General Counsel will be retiring April 1. We brought Kevin Fitzgerald in as the new General Counsel. And then our -- the head our government affairs is retiring later this year, and Ken Parker is with us today, and he heads up our government affairs. So the company has been busy on many fronts and positioning ourselves for success going forward, and I feel good about that.

We're well aware that we have challenges, like every company. When we get up in the morning, we think mostly about safety. We think about meeting customer expectations. And then every conversation gets us back to reducing regulatory lag. That is certainly the key financial issue facing the company. So we're going to be very busy by the end of this month. We'll have 6 rate cases underway, cases in all of our jurisdictions. We are pursuing alternate rate-making mechanisms, whether we're looking at forward test years with the grid resiliency in Maryland, looking at a tracker, the discussions in D.C. on the underground and involve a tracker. But candidly, we need to close the gap at the base rate level. And we're really trying to come into these cases, pushing that as hard as we can. Obviously, that involves a continued outreach to the key stakeholders. One of the things that I'm hopeful of and given the opportunity to work through the generic proceeding in New Jersey is to consolidate tax adjustment issue, which, candidly, has weighed very heavily on Atlantic City Electric. And we need to resolve that such that, that jurisdiction is given a much better chance to earn its allowed return on equity.

So we've made good progress, but there's more work to do on meeting our customer expectations. I've already talked about the day-to-day improvement. We're going to do it again. We had a $1.2 billion CapEx plan in 2012. We're going to it again in '13. That's part of a $5.9 billion plan over the 5 years. That doesn't include any incremental CapEx with regard to potential undergrounding. We'll only do that if we get a tracker in place.

But the other thing that's important, I think, to note is we've actually built the capacity internally from a design, a planning and logistics, just the construction capability to be able to execute that type of a plan. We're making great headway in the Smart Grid. We're essentially done in Delaware, just about done in D.C. Substantial progress for Pepco in Maryland will be done, the deployment Pepco in Maryland. We're starting the deployment for Delmarva, Maryland, had a very -- what I thought was a pretty productive conversation with Governor Christie about 2 years ago -- or 2 months ago, I should say, about our interest in being able to take the Smart Grid to New Jersey as well. And tying that in not only to the day-to-day capabilities of the system but also with regard to just how beneficial that is in a -- during a large restoration effort, when you actually know where the customers are out without them calling us. So I'm very, very pleased about that.

And I also think that the -- one of the, I'd say this advisedly, post derecho, given the significance and how widespread the damage was, is a recognition at the political and regulatory level that these -- that the electric infrastructure is -- does not satisfy what customer expectations are after major events and a recognition that it is a solvable issue, it's fixable, but it's going to require significant investments. So even when you look around us, other utilities making similar plans to make significant investments in hardening a system. The big news for us in January kind of emanated out of the decision at Con Ed but certainly bled right into our situation with regard to the cross-border lease resolution. We feel good about not the outcome because we always felt strongly about our position, but we feel good about the path ahead and our ability to execute through that and actually come out of it with incremental cash. And Fred will talk to you a little bit about that and what it might actually mean to our financing plan on a go-forward basis.

And also, we're very much focused on the current status of PES. But we do have faith, and we think we can work through as they build back up the pipeline, as the market should be rebounding.

So our priorities are clear. It's a pretty straightforward plan. We get up, and we're going to -- Dave and his team have a very, very detailed plan focused on the operational customer level, on the customer basis. One of the things that we're -- it's very interesting, is that as we put a 21st century grid in, we had to recognize that we had a, I would say, kindly, a 20th century Customer Information System. And for all the things that we need to do to satisfy our customers, we felt it was time to basically bite the bullet. And it's a huge, huge undertaking to transform the Customer Information System. So we've got that underway. We expect a significant progress over this year and would be planning to go live in 2014. And all of that, I think, is going to help us continue to meet our customer expectations.

In terms of the priorities in the financial front, all of this construction is going to require that we stay in the rate case business, and all that's intended to help us increase rate base. We've got the capacity to handle 6 cases at one time. I'm hopeful that as we get reasonable outcomes, that maybe we don't have to do it quite as often, but we certainly have that capacity. We're going to continue to manage this business to low risk. And with that, we know we can maintain solid credit metrics, ample liquidity. And this will be the first time I say it, we remain committed to the dividend. And I feel good that this is a team that I think has been able to do deliver on its commitments, including our commitment to the dividend.

This slide just gives you a sense of what that construction program should translate into, basically providing the 50% increase in our rate base by 2017. And you can see the components to that spend, and all of that is intended to help us meet the expectations of our customers.

So the value proposition, in my mind, is pretty clear, and I like the position that we have. We think that we can translate that effort, that spend, the rate base growth, into value. We know how critical success in the regulatory front is. And we also feel very strongly that with all the work that we've done up to this point, that we actually have fairly manageable financing requirements. And we've talked a lot about the dividend. It's a very attractive yield. We talk about the dividend fairly routinely. I think I mentioned on the earnings call that even with the situation with the cross-border leases, as we talk to the board, there just is that rock-solid commitment that we think is important and a huge component of our value proposition. We see a path ahead as we make this investment, and we get reasonable outcomes that will be able to evolve into a targeted payout ratio that's more in line with our utility peers. So I feel good about it.

But I'm going to make a couple of comments -- not on the slide -- maybe just to offer some other perspectives. I'm just starting my fifth year as CEO. As I reflect back on kind of the journey to this point, I feel very proud of what the team has done. We have faced some fairly serious issues. We made some significant decisions about repositioning the business, that we've been able to fairly quickly grow into a capacity to really drive construction and to take innovative approaches in technology. And so I feel very, very good about that. I'm very confident about what we've done and our ability to keep doing that. It's not lost on us, that there's a huge dependency with regard to getting reasonable outcomes. And one of the questions that you ask, and I would like you to know this, is that if we find ourselves in a place where we're not getting reasonable outcomes, we're prepared to reassess the spending level. We're not going to be blind to this. I don't expect that's going to happen. We think that, perhaps, unlike prior efforts in front of the regulators, we have a very, very strong story to tell, and the performance is there. When I stood in front of you this time last year, I mentioned about the intersection of operational improvement to reasonable regulatory outcomes, and that's where I think we will be. But we also recognize that there's a point where if we don't get that, then we have to think about the spending. That's not intended to be a threat at all. It's just a statement of reality. But we're committed to this plan. We feel very confident in our ability to deliver results operationally and financially.

And with that, I'd like to introduce Dave Velazquez, who will talk to you about the Power Delivery plan. And I'll be back up later on if you have any questions. Thank you.

David M. Velazquez

Good morning. Before I begin, let me introduce Mr. Charles Dickerson, who's here with me today. He's our Vice President of Performance Management and Support Services and certainly is available to answer any questions you might have as well after the presentations are done.

I wanted to start -- for those of you who may not be familiar with PHI, just a brief overview of the Power Delivery business. Basically, comprised of 3 utilities, starting in Washington, D.C., stretching east across the Delmarva Peninsula, then through Southern New Jersey to the Atlantic Ocean, comprised of about 2 million customers.

I wanted to start today by talking about 2012. 2012 is a very good year for the Power Delivery business. Joe has covered a lot of the points on this slide already around a lot of the improvements we've made around reliability, which has been a very, very big focus for us. We're beginning to show some very material, measurable, significant improvements. Across the board, I would say reliability in 2012 has improved by about 25% reduction in both duration and the frequency of outages versus 2011. As well, the 2 major storms we had in 2012, with derecho and Hurricane Sandy, both the improved reliability but also the improvements we made to our customer communications and also to the processes around storm restoration beginning to show fruit and evidence in strong performance there as well. Customers are noticing that difference. And in a minute, I want to talk a little bit about some of the surveys that we've done and others have done that show that customers are noticing that difference. And their satisfaction with the level of service we're providing them is definitely on the rise.

As Joe has mentioned, completed about $1.2 billion of capital improvements to our system on the Smart Grid, I'm proud to have passed the milestone of having installed the 1 millionth smart meter in our service territory in 2012 and, again, continue to work very hard on the regulatory front with a number of cases.

I want to start by talking about some of the customer satisfaction improvements that we've seen in 2012. I think this is an important place to start because all the work that we do, whether it's around improving our processes or investment in the system, is all done with an eye towards improving the level of service, the level of reliability that we're able to provide our customers. We do surveys on a quarterly basis. We use an independent outside firm, Market Strategies International, to do that. When we look at the results in 2012, the results of overall customer satisfaction are improving across all 3 of our utilities. Overall, the scores increased by 9 percentage points in 1 year, which is a significant increase.

As you'd expect in our territories, both reliability and performance during storms, kind of top of mind for our customers and one of the most important things they look at when they look at our utilities. We rank very high. The scores are very high for both Delmarva Power and Atlantic City Electric. Also, they're increasing for Pepco as well. Besides that, there are 2 recent J.D. Power surveys that I would note. One was done after Hurricane Sandy that they surveyed 31 of the utilities that were impacted by Hurricane Sandy. And in their press release, they noted Atlantic City Electric is one of the utilities that showed very, very good performance in the storm. But all 3 of our utilities in that survey ranked above average in the scores that they received from our customers. And then finally, J.D. Power's 2012 Residential Survey, in the category the Midsize Segment in the East region that Atlantic City Electric and Delmarva fall into, Delmarva Power ranked third, Atlantic City Electric ranked 5th. Pepco, which ranks in the -- is ranked in the Large Segment, continues to be below average, but we see the scores improving there as well.

One of the key drivers of that improving customer satisfaction is shown on the next slide, Slide 4, which is the improving levels of reliability. So this slide shows the improvements in reliability in 2012 over 2011 for each of the utilities, showing both the improvements in frequency of outages, the reduction in frequency of outages, and also the shortening of the duration of outages. So every single utility on every metric showed at least a 20% improvement, just very strong performance. I should also note that all of the utilities in all of the jurisdictions are meeting the reliability standards that have been established in those jurisdictions.

And the next 2 pages just drill down a little bit to illustrate that around our Maryland jurisdiction. So on Slide 5, showing the Pepco Maryland jurisdiction, on the left-hand side, our performance on safety, which is a measure frequency of outages, and the right-hand side, our performance against SAIDI, which is a measure of the duration of outages. The solid bars show the performance -- our performance in 2011, 2012. The dashed line are the standards that have been established by the Maryland Public Service Commission in their Rulemaking 43 in 2012. So you can see, we are clearly exceeding the standards that have been established for reliability for us in our Pepco jurisdiction.

The next page shows the similar data for Delmarva in its Maryland jurisdiction. And again, the utility is meeting the standards that have been established by the state and showing significant year-over-year improvement.

Reliability in response to storms is also important in the major storms we had. And I think this page speaks for itself. It shows comments that we received both from the press and from officials across our territory both, in the top, after the derecho, and in the bottom of the page, comments that were made by elected officials after Hurricane Sandy. So tremendous, tremendous effort by everyone involved in the company to respond to both of those outages, and again, I think it's been recognized.

After the -- I'll mention that after the Maryland -- after the derecho, Maryland opened up a set of hearings for all the utilities to talk about the performance during the derecho. They recently issued an order and really 3 -- I think, 3 major points that they made in their order, which I think are worth noting. One is they noted that the electric utility infrastructure in the state of Maryland is just not resilient enough to withstand a hurricane-style event, whether it's Hurricane Sandy or derecho, which has been characterized as a hurricane without warning. Secondly, they concluded that the public is not satisfied with the state of the vulnerability of the electric utility distribution system in the state of Maryland and that the customers aren't satisfied with the fact that after a major storm, it takes a number of days to restore that. They did note that there are no violation of standards by any of the utilities. There's nothing in the record that would warrant any further proceeding in that. But they did -- the order also issued a number of directives to the utilities. Now a part of that, it also goes to the staff to take a look at some of the standards that they have. But most of the directives were issued at the utilities to conduct some studies and provide the commission with data around what would it take to create an electric distribution system that in a derecho-style event, where we have 480,000 customers out, to be able to either prevent those outages or restore those customers within 24 hours, within 48 hours, within 72 hours. So a number of pieces of data they wanted around both the costs and, actually, what resources it would take to do that. So I think an indication of kind of where they believe customers' expectations are for the electric system.

Also coming on the heels of these storms, Maryland commissioned the Grid Resiliency Task Force, which has completed its work and I want to talk about that later. And also, D.C. commissioned a power line undergrounding task force, which I also want to talk about later. But again, a lot coming out of the storms saying that there's things we need to do to move forward to examine how we might harden our system.

Now let me just finish talking about this by saying, as we look forward in the business towards 2013, it's really going to be more the same. Our focus isn't changing in 2013, continuing our drive to continue to improve reliability, continue to improve customer service, continue investing at the level we have been in building and renewing our transmission and distribution infrastructure, moving forward with the Smart Grid and also beginning or continuing to execute our regulatory strategy, which Fred will describe in more detail later.

I wanted to turn and talk for a minute, before I talk about our O&M spend and our capital plans, a little bit about our service territories and kind of the economic outlook and the sales growth. So on Slide 9, left-hand side, a couple of pie charts that simply show we have very good both regulatory diversity between the jurisdictions, as well as customer diversity between the different classes of customers. Short term, we would characterize the economic outlook in our territory as mixed. If you think about Pepco, it's always been the most stable of our jurisdictions, least affected by the recession. Sequestration may have some impact on us in 2013. In fact, we think at the end of 2012, we began to see some of that in some of the reduced commercials sales in the Pepco territories as people prepared for that.

I'd characterize Delmarva as kind of getting back on track towards the national trends. Employment was pretty flat in Delaware in 2012, see that beginning to pick up in 2013, and expect that Delmarva will continue to track to national trends around employment.

ACE, regrettably, has been lagging and expected to continue to lag a little bit behind the national trends. There's been some new casino development. The new Revel casino opened up in 2012, but that has not produced any new -- net new jobs there. In our service territory, there was damage from Hurricane Sandy. The reconstruction should pretty much be done by the summer season, so that should not have an impact on that.

The next page shows our sales and customer growth. Over the long term, we expect those sales and customer growth over the next 5 years to be just slightly under 1%, at 0.9% per year growth that we expect to see. In the shorter term, from '12 to '13, we expect that the growth will be a little bit stronger, around 1.4%, and it'll be different in each of the jurisdictions. And in the appendix, we actually provide a breakdown in more detail around the different customer classes and the sales growth in each of those classes for each of the utilities to provide you some more background on that.

Turning on the next slide, to our operation and maintenance expense. Bottom line on this slide is that we expect that in 2013, the O&M expense for the business, the Power Delivery business, will be between $850 million and $880 million. We show both 2011 and 2012 actuals there as well. The O&M we're expecting in 2013 will be a little bit less than it was in 2012. And really, the 2 key drivers of that are some employee-related costs, including pension and OPEB, and then also some cost efficiency improvements that we're implementing this year that we expect to see some savings from. So not a significant drop in O&M but a noticeable drop.

In 2012, on the next slide, I've actually broken apart the operation and maintenance expense to give you a sense of where we're spending the money. If you just look at the pie chart on the left-hand side, about 1/4 of the O&M expense goes to operating the system. This includes both our electric and our gas system. About 1/4 of it goes towards customer care, and that's everything from reading meters to collecting bills, to sending bills, to answering the phone, to advertising our uncollectible debt, all that's in customer care. And then we've broken out for both the maintenance, and I would class tree trimming as maintenance as well. So we show both the tree trimming and then the actual maintenance on our system, and then also the reimbursable/recoverable portion and the admin and support.

Turning our attention to the capital forecast on Page 13. Over the 5 years, we expect to spend $5.9 billion in capital investments in our system. For the years, if you compare this to last year's forecast for the years 2013 to 2016, this forecast is about $237 million higher than the same period when we forecasted last year. And again, in the appendix, there's a chart that shows the detail of what the key drivers are driving this, the higher expense. The bar charts on the right are simply there to show you that the spend is pretty evenly distributed through the 5 years. There's not a single year where all the spend is coming, but fairly evenly distributed. And at the bottom the page, you can see that it's almost ratably spent between the 3 different utilities.

The next slide, I want to walk through in more detail some of the different pieces, starting with the distribution piece of the capital budget that's about $3.8 billion. About 2/3 of that distribution spend is focused on reliability and aging infrastructure. We expect that at this spend level we will be able to continue to meet all the reliability standards in the various jurisdictions that we serve. The rest is driven by customer-driven work and load growth. And even though our load growth is not high, with continued load growth of just under 1%, we expect to either complete or start, in the next 5 years, 17 new substations across our territory, and they're spread fairly evenly across the territory.

The next couple of pages, I want to highlight some of the specific efforts that we have underway. And I like to start by talking about system hardening discussions that are taking place with Pepco, in both Maryland and also in DC, specifically around undergrounding. I should note that the expenses I'm talking about or the cost that are reflected on Slide 15 and 16 are not included in the capital plan that I just showed you. Any expenses related to this, or costs related to this, would be in addition to the expenses that are shown. So when we filed our Maryland rate case in December of 2012, as part of that, we filed for a Grid Resiliency Charge. And part of that was a tracker mechanism, let's say, if we're going to increase expenditures over the level we have, we would expect to get more contemporaneous recovery in those expenditures. And as part of that, we outlined a plan to start undergrounding certain distribution feeders. We started with 6 distribution feeders, 3 in each of the counties that we serve. Focused on feeders that had the worst, if you will, performing reliability statistics and also feeders were some of the other system hardening things that we could do around trimming trees or other techniques we could use wouldn't be as effective and to really get the reliability improvement would need to just simply take these circuits out of harm's way, if you will, to put them underground. The cost of undergrounding those 6 feeders that we filed was about $151 million and we would expect to do that work over 2, 2 to 3-year time period, 2014, '15.

Also as part of that Grid Resiliency Charge to improve the reliability, we said there's other things we can do to accelerate some of our other efforts. So every year, we take a certain -- we're mandated to take a certain number of circuits in the state that performed the worst from a reliability standpoint, and spend money to remediate those circuits. So in Maryland, in Pepco's jurisdiction, there will be 21 circuits that were mandated and we've identified to improve in reliability. In addition to that, we've identified another 34 circuits that we would spend money and time to remediate the reliability issues on them.

So in our base plan, we already have 55 priority circuits that we're doing work on. We proposed as part of the Grid Resiliency Charge to add an additional $12 million per year or 12 circuits per year to that list. And again, do remediation work on those.

We also proposed to accelerate our tree trimming cycle in Maryland. We're on a 4-year trimming cycle where we go through the entire system in 4 years and trim it. And we said that as part of this, we would accelerate that, so that we would complete the next 4-year trimming cycle, which started in 2013 in 3 years, and the cost of that is $17 million.

We also noted that we're continuing to look at things beyond just the 6 distribution feeders, but that certainly is not enough to completely harden the system in Maryland. We're looking also at options around the 69 kV feeders. Many of our substations in Maryland, in Pepco's Maryland territory, are fed at 69 kV. Those lines are also susceptible to damage during storms, and we have seen damage to those lines during storms. So we begun look at options for undergrounding, potentially, some of those lines. We also outlined in the testimony, a plan, a 5-year plan of approximately $200 million a year for continuing to underground additional distribution. But the specific ask in the rate case around it, the Grid Resiliency Charge is really focused on the top section of the page, the initial 6 feeders, the priority feeder work and the additional tree trimming.

In DC, in August, the mayor commissioned a task force, the Power Line Undergrounding Task Force which was given the charge of improving the reliability of service of the electric distribution system, particularly during major storms. And a particular focus of that was in undergrounding the system. Joe Rigby chairs, co-chairs that task force along with Allen Lew, who's the City Administrator. They've been working since August and, hopefully, we'll be able to conclude that work in the next few weeks.

As the task force is approaching its work, it established a number of committees to look at different aspects of this. One of those is a technical committee, which I note in the second bullet. They've completed their work and are recommending that the best benefit, or cost benefit, around reliability would be to underground the primary, the 13 kV, portion of the electric distribution system, but not underground the secondary wires, the service drop into your house, the 120, 240 volt lines line along the street and leave those overhead. As part of this, as part of some of the discussions they've been talking about a plan over the next 5 to 7 years that would cost about $1.2 billion that would underground about 50 to 60 feeders. If we were to underground the entire -- the District of Columbia, the entire portion of the primary's 13 kV system that is overhead, the total cost for that would be about $3 billion. And this $1.2 billion reflects a significant movement towards getting part, at least part of a significant part, of that done.

I did also want to talk a little bit about the Smart Grid on Slide 17. We talk a lot and have talked a lot about -- and I mentioned we've installed our 1 millionth smart meter. When we think about the Smart Grid and bringing benefits to our customers around the Smart Grid, it's' almost as if the smart meter is just one small piece of that. Really necessary piece, an essential piece, but it's only one piece of that. And on the page, I've listed a number of other things and I wanted to touch on a couple of them.

There's a lot that goes with -- the smart meter provides an enormous amount of data, both for us and for the customer to utilize. One very, very important aspect of that as well is developing the customer application, which we begun to do, that allows customers to use that information in a way that they can manage their energy usage and save money. And we begun to roll out a number of things both on our website and also on mobile apps that allow our customers to do that. We actually have our second-generation mobile app out there already that allows customers both to report outages, to provide us information of how they like to be contacted when the power is restored, provide them estimated time of restoration and a number of things around outage. But also allows them, at this point, they can pay their bill through their mobile device. And the third-generation that we're working on, we hope to just continue to increase that functionality. The goal would be, ultimately, that whatever you can do on a website, you'll be able to do on your mobile application, on the mobile app as well. We're well underway to doing that.

I'd also note further down the page, as Joe has mentioned, we've begun a project in 2012 to replace our legacy billing systems. We still have 2 legacy billing systems that date probably from the 1960s. With the Smart Grid coming, those systems are just no longer capable of being able to meet our customers' expectations and handle the data that's coming back from the Smart Grid in a way that's most useful to our customers. We are replacing, and this is a distinction with a difference. We're not just putting in another customer billing system, but we're actually putting in a customer relationship management and billing system. The relationship with our customers, as we go forward, the information that we have is going to change that relationship. And we need to have a system that allows us to much better manage that relationship in a way that meets our customers' expectations.

Also this year, we began in 2012 and in a very big way in 2013, in both Delaware and also the Pepco Maryland territory, are rolling out dynamic pricing. So this, to me, if you will, is a killer app for our residential customers to the Smart Grid. So a lot of things, a lot of benefit to the Smart Grid is brought to us and our customers see today, reducing estimated bills, our ability in a storm situation to be able to tell when customers are out and when they're restored. The dynamic pricing is a mechanism that's going to will allow customers to take that energy information they have and their usage and, during summer peak periods, be able to manage their usage during those peak days and actually begin to save money. And to me, that's when the Smart Grid begins to get real for our customers. If your remember when the typical residential customer gets their bill, 75% of that bill, the cost of that bill is all about the actual energy they use. Only 25% is the delivery portion of that bill. So what we're doing with the Smart Grid is allowing us to use that investment we've made in that small portion of the bill to allow customers to leverage savings and leverage their patterns of usage to reduce that 75% of the bill.

The next slide is one that we've used before and just shows our progress, along the Smart Grid, around the advanced metering infrastructure we're installing both where we are in having installed the -- installation of the meters, as Joe had said, we're virtually complete in both the District and also in Delaware. We expect to complete installation of the smart meters in the Pepco Maryland territory in the third quarter of this year and are beginning to move forward in Delmarva's Maryland territory.

Also I wanted to provide a little bit of -- a little bit more detail as we continue to talk about our capital expenditures around the category that we call, Other, which at $670 million is fairly significant. So you could see on the table on the right, breaks that down into a number of categories. I don't think there's anything here that is probably unexpected. We have a gas delivery business. They also have aging infrastructure and have programs to replace both their cast iron and bare steel pipes in the ground. Continue to hook up new customers and it's about $140 million of investment. Our Information Technology Systems, we need to both upgrade the infrastructure and also some of the business systems we use. I've mentioned already the customer relationship management and billing system we're putting in place. We additionally need to invest the money in some of our facilities to continue to bring them up-to-date as well. Our communications with the smart grid is becoming a more and more of important piece of our business. We're beginning to move enormous amounts of data around the system, not just internal to us, but out on the system, and that requires investments both in radio towers replacing some of what we have, as well as the purchase of some additional radio spectrum and some broadband wireless equipment that we need to be, again, to be able to move this data around efficiently.

The last category, I want to touch on is our construction expenditures for the 5 years, about $1.34 billion of investments. On the right-hand side, I've broken those down into a few categories, give you a little more insight where the money is being spent. Customer Driven on the transmission side, we have a number of rural electric co-ops in municipalities that we serve, sometimes we have to do overtime, we do work on our system to improve our service to them. That and any other high-voltage transmission level customers we have and that's reflected in the Customer Driven line. The Reliability line is replacement of equipment basically on aging conditions, like-for-like replacements, spare transformers, aging transformers that we're replacing, things like that. Load, I mentioned we're installing, either starting or will complete 17 new stations in the next 5 years, most of those will require some amount of transmission work or work on our transmission system to supply them, that's what's on the Load line and then we show a number of categories that are included in PJM's Regional Transmission Expansion Plan, or RTEP Plan. So that's the breakdown of our transmission construction expenditures.

Before I open the call to questions, I just want but to make a comment, overall, about the Power Delivery business. We've talked about this quite a bit. Our focus continues to be on improving reliability, improving customer service, improving our response in storms. It makes some very significant progress, I believe, on all those fronts, but it's not something where we're stopping or slowing down, we're continuing to work just as hard as we have been. Both through the Smart Grid and replacing our customer billing system, we really going to be positioning ourselves to be able to leverage the technology, to really enhance our customer experience and our customer service. We have a significant capital spend ahead of us, a lot of products to complete, a lot of good projects to, again, continue to improve the reliability of our system, replace some of our aging infrastructure. We expect, over time, to see revenue growth coming both from reasonable regulatory outcomes, but also from the modest long-term growth in our system. And let me just finish by saying, we very much understand the linkage between providing value to our customers and our ability, by doing that, to drive increased value to our shareholders.

So with that, let me open the floor to questions, that anyone has.

Question-and-Answer Session

Unknown Attendee

Dave, you know the $5.9 billion base CapEx spend that you laid out for 5 years, in your comments, you talked about some potential additional projects that could be incremental to that. At the same time, Joe, in his opening remarks talked about the need to be vigilant and perhaps revisit the CapEx spending, if that regulatory outcomes are just not coming out the way they're supposed to. Could you give us some sense of variability of how we should think about, I mean, on the upside, if things work out as you would like them to, how much incremental CapEx you could spend? And then, perhaps, on the downside, if you do need to pull back, presumably there are sudden expenditures you would not cut back, but just give us a sense of what variability there could be in that program, depending on how things play out over the next 5 years?

David M. Velazquez

Yes, on the upside, if you will, I think, if you look at the slides around system hardening, we've laid out depending on what happens in the various jurisdictions, could be considerable additional amount of spend. But again, we would only undertake that if we got the right regulatory recovery, so we've add a tracker mechanism or some way of much more, I'll say, contemporaneously with the investment being able to get a return on our investment to do that. So not proposing to continue increasing the plan without some of those mechanisms in place. I think on the other side, as Joe had said, we fully expect that we're going to get reasonable regulatory outcomes this year in all the cases we have going forward. I think we have to wait until we actually saw what happened, if they weren't reasonable to then make a reassessment of what we would do with this plan.

Unknown Attendee

Just clarify on the downside scenario, how much flexibility do you have in that plan, the $5.9 billion? I mean, is there stuff that you just have to spend regardless? Or do you a fair amount of flexibility on that spending?

David M. Velazquez

Every project that is in here, I would say, is an appropriate project to do. But again, we'd have to look to see what signals we're getting from the commission around the next set of cases before we make any decision about what in the plan we might continue to keep in. We just have to reassess it at that time.

Unknown Attendee

Just on the O&M, you have this pie chart. Could you give us a breakdown of -- your have operations, customer care and maintenance all that good stuff. Where the O&M savings are coming from, which categories? Then I have a follow-up.

David M. Velazquez

The O&M savings are coming across all the categories, so there's no one particular one that they're coming out of, I'll say more than the other, but our -- I'll say somewhat evenly spread across all the categories.

Unknown Analyst

So customer care, operations, tree trimming, administration support? Is that a particular utility that O&M savings are happening or is it also across-the-board?

David M. Velazquez

What we've been looking at them, as we go into 2013 and like any other company do this on ongoing basis, you look across and see where you might have some opportunities to create some operational efficiencies. And that's really what we're doing. So it really has not been focused on one particular utility or one particular area of business of so we haven't, for instance said, customer care, we're just focused on that area. But rather have focus across the board and taking a look at all the areas and are looking for some improvements in all of them.

Unknown Attendee

And I know you haven't given guidance for '14, but how much of the O&M savings are sustainable going forward?

David M. Velazquez

I would think that a large majority of the savings we have will be sustainable going forward. Of course, in 2014, there'll be continued, I'll say inflation, cost pressures, not quite sure what 2014 will bring to us as far as the overall O&M spend.

Unknown Attendee

I would just go to revisit your sales forecast here. Just looking historically in the last couple of years, sales growth hasn't been -- has been negative and you guys highlight that, but you guys expected to go positive. And I wonder if you just comment on that given the history just as you mentioned, PG&E has similar profiles is, I think, forecasting negative sales growth this year and that's kind of in your neighborhood, at least with Pepco. You got the nPower thing going on in Maryland which I think is absolute reductions in sales but yet you still have the sales growth going up. And also smart meter deployment, I would seem that, that would also perhaps start kicking in here, enabling -- enhancing energy efficiency in sales and what have you beyond the customer base so therefore all of those things -- yes, I'm just trying to -- I'm trying to reconcile that with this sort of snapback in sales growth that you guys see and why that is?

David M. Velazquez

Well, I think over the longer term, we're forecasting about 0.9% sales and customer growth. And that accounts for, as best as we've been able to, programs like nPower Maryland, other efficiency programs, impacts of the smart meters and all that. I just point out that we -- the reason we provide both the sales and customer growth is that in a number of our jurisdictions actually our revenue decoupled from sales. It's important as you think about the company to look at both. I think some of our territories, there's a variety of reasons that are driving, if you look at 2012, and then the increases coming in 2013 going forward, a lot of it in Pepco and in Delmarva revolves around, I'll say, a stronger growth coming in 2013 around the commercial sector, Atlantic City Electric, more driven by the residential side of the house.

Unknown Attendee

But I mean, given all those things that we just talked about, I mean, you're saying, what? That you're seeing a large amount of commercial development? I'm just trying to get sort of a sense, I mean, you've had negative sales growth, what is it that's changing here? I mean, you guys have a better economy, given all the federal spending and everything, I'm just trying to get a sense of this to. What is it that's driving -- what is it that's changing, I guess, if you follow me, when I'm looking at all these things that suggest that just a guy outside the business, we think that would be more negative in terms of demand growth?

David M. Velazquez

Well, I think if you look, let's say -- let's just take Pepco territory to start with, they are, I think, on the commercial side. What we've seen was a drop off I'll say at the end of 2012, probably in anticipation of sequestration on the commercial side and expecting that to come back. There's probably been about a little over 3 million square feet of new office space coming into the D.C area as well, which also tends to drive some of that again. That's not -- in the heyday, I think in the D.C. area they're try putting in about 12 million square feet a year, but that's certainly up, if you look at 2011 I think the market bottomed to just over 1 million square feet a year, so certainly some rebound there. Delmarva Power, besides the general climate, both JP Morgan, Crass and Bank of America were all big employers of up there, have announced plans are in the process of adding jobs in Delaware. So again, I say, each one is a little different but there are some specific things we could point to that are driving some of that rebound.

Unknown Attendee

Okay. And then just back, sort of Ali's question, I wasn't really completely clear on it, if we don't get an improvement in the regulatory situation, how should we think about the flexibility? I know you can't comment on specifically without having the outcome, what can happen here, but how should we think about the ability in the near term versus long term about the ability to start change your CapEx forecasting? One would think that a lot of those stuff might not necessarily be all that flexible in the near term versus the long term. Can you give us any sense as to sort of how flexible you guys actually are? Sort of to follow-up on that question.

David M. Velazquez

We're going to start to answer, we really do expect that we'll get reasonable outcomes from the regulatory cases that we have underway right now. If that doesn't occur, we certainly we have to -- we will look at everything that we have and make an assessment that, again, based on the orders, as you point out, it's very hard without seeing the specifics of the orders to make a judgment as to what the regulators are telling us are important, what we should be doing and how should we make that reassessment.

Joseph M. Rigby

[indiscernible] Maybe I can just help a little bit in the follow-up, because I know this is on your mind. And my opening comment probably drew a light to it. I think that as we've spent the early part of this year thinking about our plan, and recognizing that we've made all this operational improvement, the one thing we don't want to do is to take a step backwards operationally. We don't want to kind of get back into that situation. So it's not our intention to do that. But candidly, it's also I think fair for us to look at the plan can't just be keep filing and filing it if we're not going to kind of get what we would consider to be reasonable outcomes. So what we're trying to communicate to you is that we're in the process of thinking through scenarios. I think Dave is absolutely correct, we feel very strongly that we're not trying to gold-plate anything, we're not -- we think every dollar we're spending is appropriate and necessary. But we have to recognize that there's a balance here. And the balance between what we're spending versus what we're recovering. So we were thinking through these scenarios. We are looking for things that maybe we could delay, appropriately spread out over longer period of time. So I don't want to overstate the level of detail that we may be at, but we do want to communicate to you that we feel strongly that we need to now think about this and have this be within the range of things that we would have to consider. So we're not going to offer more specificity around -- we're going to take this out or that out, but we do want to communicate to you that this is very much on our mind. And we'll be obviously -- we want to position ourselves, such that we could react quickly and nimbly so should we not get a reasonable outcome. But I want to reiterate, we have a very strong performance record that we could put in front of the regulators, happier customers, the fact that our regulators, politicians are recognizing that there is a gap between what the infrastructure can deliver, particularly in serious weather events, and the level of investment that's necessary to close that gap, and that's exactly what our plan is intended to do. So there's every -- a reasonable person would expect that you'll get a reasonable outcome. But we do think it's prudent for us to acknowledge that we're thinking through these scenarios.

Unknown Attendee

Joe, just -- we have the microphone. But can ask you at the end if you'd rather...

Joseph M. Rigby

No, that's all right. Go ahead.

Unknown Attendee

On the '13, kind of the beginning about this cycle this year, you have 5 rate cases this year. If those don't show progress or they don't show substantive progress, where you start getting mechanisms, start getting timely recovery, is that when you make the decision or is this going to be another thing of, we'll wait for '14 and file again, and maybe '14 gets better? We kind of heard this story before.

Joseph M. Rigby

Right, yes. And candidly, Dan, that's one of the reasons we wanted just to kind of put this out on the table. Because we're not going to give you, I'll say, the definitive answer you probably want. But it's because there is part of the story that hasn't been written yet. But I do look at that the major near-term signal will be the Pepco, Maryland case which we'll get at the end of June. And I don't think we would necessarily wait until the full cycle went through. Because there's such a significant level of spend for Pepco itself. I don't think -- at least sitting here today, as we think about the future, that we would necessarily be, I'll say, kicking the can collectively until after all of this, all of these filings have taken place. We're going to react as these events unfold.

Unknown Attendee

[indiscernible] But Dave, in regards to Paul's question about load growth and relative to capital spending, right? Do the spending you guys look at, is that a function of customer growth or is that function of load growth, as far as some of these new transmission upgrades and distributions spending?

David M. Velazquez

The upgrades, if I understand the question correctly, the upgrades are more driven by load growth. So for instance, there is some level of spend every time we hook up a new customer, you may have to run new lines, every new development, every new building. But when you talk about the backbone of the system, the transmission lines, substation work, bringing out a new distribution feeder, that's much more typically driven by the change in load and not by the change in number of customers.

Unknown Attendee

So if the state programs of targeting efficiency out of customers which is generally really more than 1% in your jurisdictions, would actually be met and you wouldn't see load growth, therefore some of this CapEx would not be needed, is that fair?.

David M. Velazquez

Well, we have already incorporated in the load growth numbers we show you, some I'll say decrement off the load growth to account for, as best we're able to estimate now, would be some of the impacts of the energy efficiency programs, some of the demand response programs. Recognizing, again, things like the Smart Grid are still in their infancy, how customers will respond to dynamic pricing is still in its infancy and the actual impact that has on customers maybe different than we estimate, but we have tried to incorporate that into the forecast that we have.

Unknown Attendee

And I guess, one last question. Just on kind of bill impact. There's a lot -- you look at the rate base growth you have between now and '17. It's a lot of capital going to work. What do you guys see being the rate of inflation on customer bills separate from the power cost of energy going into the bill right now?

David M. Velazquez

Maybe I'll let Fred answer that customer bill impact question after his -- even now or after?

Frederick J. Boyle

I can comment on that. So look at the lag we've had, and I think you would've seen this in last year's deck, and it's something I'll touch upon here, a few slides into that deck would be increases on the low single digits would be sufficient for us. 5%, below 5% even would be sufficient to meet the needs of the capital spend we have.

Unknown Attendee

Just to clarify, none of the undergrounding in the 5-year forecast?

David M. Velazquez

None of the undergrounding shown on the slides that -- I talked about the undergrounding task force. I mean, there are some, I'll say, minor undergrounding projects that we undertake are part of it, but not the big spend. You see, Angus [ph], pages 15 and 16, that is not in the 5-year numbers.

Unknown Attendee

And then as you see regulatory outcomes, with the potential pulling back of capital happen on a jurisdiction-by-jurisdiction basis? Would it be spread across kind of the entire company?

David M. Velazquez

Well I think, again, it depends on what we see, but I think we would try to target the capital spending around where we're getting the rate recovery.

Unknown Executive

Now let me turn it over to Fred.

Frederick J. Boyle

Let me move through some of the appendix here. Okay. Before I get started, I would like to introduce some other members of the finance team that are here today. First of all, there's Kevin McGowan, who is Vice President and in charge of regulatory affairs; Art Agra, who is the Vice President in charge of Strategic and Financial Planning. I know there's nobody standing, I don't know if you can like wave or something there. Bob Chewning, who works with Art, is the Manager in Strategic Planning; I think everybody probably knows Donna Kinzel, who is the Vice President and Treasurer; Jeff Snider, who works with Donna as Assistant Treasurer; and then the balance of the IR team, Brian Shivery, Margaret Barry and Annie Barry [ph]. So thank you to all of them, first of all, for the help in putting all this together.

The strategy -- really this kind of dovetails into the conversation, I think, we were just having. Certainly, what we're looking for are fair returns. And it's a theme you're going to hear, you've already heard, and are going to continue to hear here today. How do get to fair returns? I believe the keys for us is delivering on customer -- to customers on reliability and overall customer service. We've talked about lag, it's been mentioned, it'll continue to be mentioned today and some of the different mechanisms that are out there for addressing lag. But short of commissions adopting some of these mechanisms, as we've talked about, we'll be in -- filing on a regular basis. It's not a solution because that doesn't solve lag, but we'll be in that position, given the projected growth we have in rate base and in our capital spend. In order to execute on that, we need depth within the organization, PHI in total. It's not just regulatory, we have good depth within regulatory and we're able to execute on those cases. But it's also within legal, within Dave's group, within engineering. Joe, I hope I didn't say anything wrong to be make you leave or -- sorry. So we have the depth and we're able to execute on this, and I think we've shown that. Joe alluded to some of the new players we have. Is not just about filing of the numbers that are in the filing. We need to reach out and communicate with Ken Parker, who is a new player, and his team in government affairs; Kevin Fitzgerald is new, who has a lot of experience around the country, been involved both at the local levels, if you will, at the state levels and through the national FERC and NRC, et cetera.

So with that, I'd like to talk about some of the accomplishments since our last meeting. So over the last 12 months, we have resolved and settled 5 cases. If you think back on the 5 cases, we ended up being awarded a little over $100 million in revenue requirement. Last year, at this time, there was discussion around what was called the RIM, which was something that we were focused on and pushed. And that would have done was allow some more forward-looking treatment, as far as capital spend, so we could avoid having to go in on an annual basis for rate cases. Now even though the RIM was not adopted, I think it did help advance some of the discussions, and we did see some benefits of that or are seeing some benefits of that in the Maryland -- say, in the Resiliency Task Force Report, which adopts some of the concepts, or at least references those, of trackers of forward-looking test periods.

We have currently filed 4 cases so far, and we're going to file 2 more cases, Delmarva will be filing in Maryland and in Delaware, here, before the end of this month. And part of our strategy in these cases is to make them clean cases. In other words, follow the precedents that were set in the last commission orders, try to keep them real clean and concise so there's not a lot of excess issues, if you will, that we're dealing with. Now that said, we are pursuing additions, through the end of 2013, in all of our cases. We view this as an important step which would really go long way towards cutting into regulatory lag. It's not going to eliminate it, but it certainly help on that front. Also, we have the Grid Resiliency Charge, which Dave has talked about and we can talk about a little more later. At the FERC level, last year we -- when we updated our rates, we ended up increasing the revenue requirement there, by about $40 million. And that will be happening again, this year we'll be doing an update.

On the regulatory environment, Dave has alluded to some of the diversity that we have across our jurisdictions. If you look at the pie chart here, you can see that the FERC jurisdiction makes up 24% of our rate base. And then we have good diversity across our other jurisdictions, with Maryland being the largest percentage, at 27%. But we don't have too many eggs, if you will, in one basket. So we do have good delivery -- or good diversity.

As far some of the other positives there, on the FERC formula rates, it provides a nice mechanism for us to be able to annually update filings to significantly mitigate regulatory lag at the FERC jurisdiction. And very importantly, on this regulatory environment is the performance, that Dave alluded to, we've seen in the SAIDI and SAIFI improvements and the other customer service improvements. We view that as essential for us being able to have success in the regulatory arena, and we are seeing that.

As far as challenges, not surprisingly, you see the regulatory lag noted there. And we'll continue to pursue eliminating or at least mitigating some of the regulatory lag. Now the other challenge that's noted there, it says the ever-increasing customer expectations. Through storms, we certainly hear it, as other utilities do, from the customers. The dependence on electricity with electronics, et cetera, just seems to have ramped up, and the tolerance for outages has gone down. Now while that's a challenge, I think, there's bit of a positive there in that this provides a mechanism for us to discuss alternative rate making mechanisms with our commissions. And we've seen some of that, again, with the Governor's Resiliency Task Force in the DC, with the undergrounding. Those discussions are being driven by the expectations of customers.

The next slide looks at our rate base. And you can see here that we have -- our total rate base at the end of 2012 was $6.5 billion. Of that amount, about $1.5 billion was associated with the FERC jurisdiction, with the balance just about $5 billion then in distribution. And you can see there the diversity across the utility companies, as far as the components of that.

This slide is a new slide and really provides a lot of, what I view, very important information and it's something we need to look at closely. If you look on the left-hand side there, you'll see the list of the jurisdictions starting with, say, Maryland Pepco, and Pepco DC, et cetera, coming down. The second column then talks about the test period. So for example, in Pepco Maryland, they use an average 12 months for the test period. You can see, like for example, Delaware uses a year end and New Jersey uses a year end. So the rate base numbers you see there are out of our -- or the numbers out our current filings or soon to be made filings, and they're tied in with the test period. Really, you could think of that as the rate base period also. The third column over then shows what our earnings were during 2012, or estimated earnings, associated with each jurisdiction. And you could see the lag, I mean it jumps out. I don't think this is going to be a surprise to anyone. We talked about, on the earnings call, how our overall ROE was around 6.5%, I believe, and this is evidence of why. The second to last column there shows then our pro forma. So what this is doing is taking the rate case results we had in 2012, and then making pro forma adjustments for revenues and any other kind of pass-through expenses that might have been embedded in those revenues.

So you can see there, again, even after making those adjustments, there's a significant regulatory lag. In particular, if you look at New Jersey, before the pro forma adjustments, we're at 1.5% and after them, we're at about 4.6%. So there's significant lag there. And we'll talk about that a little further, but one of the big drivers there is that consolidated tax adjustment, and how difficult that makes it for us to be able to move forward and get a fair settlement, in our opinion.

The lag -- in looking at this sheet then, the amount of lag -- in order to close the gap between the pro forma ROE and the authorized ROE, we would need incremental revenues of about $130 million to close that lag. So that would be net of about $80 million, and that would be worth about $0.31 per share. So that kind of helps you frame up the lag as we're looking at our rate cases and what we're facing. When we talk about lag -- when I talk about lag, this is what I'm talking about.

So as far as of the regulatory lag itself, you can see here, on the left-hand side, as we make the annual filings, what we're identifying here is the different jurisdictions. For example, in Maryland, once you make a filing, they'll come out with an order in 7 months. And they've been good at delivering on that, which is a positive. So the rate case that we filed for Pepco Maryland, we'd expect to have a decision by the end of June.

The District of Columbia does not have, say, a 7th month, they try and get their cases completed within 9 months. Our last around of cases was not completed within that timeframe. I think, they and we, would point to the RIM as something that required a lot of incremental due diligence. And our expectation is, this go-around, that we would be within that 9-month period. Delaware has a 7-month statute. They actually allow us to put rates in, subject to refund, which we have done in the past and we would do. So even if they don't have an order within 7 months, we will put in rates subject to refund. And then within New Jersey, again, it's noted there, there's a 9-month statute, but that extensions are granted and companies have traditionally not put in revenue subject to refund. It's something that's, I'll say then, frowned upon there. And that creates an issue. When we talk about New Jersey, there's not a hard and fast deadline, if you will, for the commission to get an order out. So when we're dealing with intervenors and trying to negotiate a settlement, there's not a drop dead date there. So it makes it a little difficult, that and the consolidated tax adjustment.

Moving over to the right side then. These are some of the initiatives that are underway. I think they've been touched upon here. Down, the last one I'd note, under New Jersey. New Jersey has established a generic hearing on the consolidated tax adjustment. That was something that was embedded in our last settlement that we reached last year. It was a recommendation by all the parties to the settlement, that the commission hold a generic hearing, and one has been set up. Actually, it's noteworthy there and important in the Delaware, we are in discussions there for a multiyear plan. So we view that as a very positive sign and are hopeful we'll be able to get something accomplished there this year.

The next slide shows the current cycle of rate cases. So you can see here the filing dates, the requested ROE. So right now, of the 4 cases we have outstanding, it's about $196 million ask. We'll be filing in the next 2 weeks there for in Delaware and Maryland for Delmarva.

As far as of the drivers behind that $196 million of ask that we have, you can see here that the rate base and the increase in O&M are the main drivers. That accounts for about 80% of the increase in revenue requirement that we're asking. Included in that, I'd note -- I talked about these forward-looking 2013 reliability adds. So embedded within these numbers, within that $196 million, there's about $45 million associated with that.

This slide shows some information on each of the jurisdictions. And I think it's a good takeaway, so I certainly won't spend a lot of time going through the details. Some of it is repetitive, where we talked about the timing of rate cases by jurisdiction, but I think it is a very good informational slide. If you look down at the lower third, say, of the slide, you'll see there the list of the commissioners. As far as any changes in the chairmanship, there's only been one in the last 12 months, and that is in Maryland where Kevin Hughes is now the Chairman of the Commission. And Doug Nazarian is no longer on the commission. He's moved on, he was -- appointed a judgeship in the state of Maryland.

As far as of the regulatory lag and our focus on that, these are things, really, areas I think we touched upon, that we believe are going to drive and help us be able to cut into the regulatory lag: Through the regular filings, the pursuit of some alternative mechanisms such as the GRC and multi-year plans.

The next few slides go into some detail on each of the cases that we have outstanding. This first slide is the -- is on Maryland. There, we have had an ask of 60 -- just about $61 million. The intervenors filed their cases last Friday. And the staff came out at about a 9.3 ROE. It was their recommendation. In their initial filing that they made they had a revenue recommendation of about $17.5 million. They subsequently amended that and now their recommendation is just about $28 million. The OPC there came out with a negative. I would note there, AOBA, as far as their revenue recommendation, was about $45 million. So with the staff focusing on that, we are encouraged there with, first of all, the ROE. If you think back to what they had recommended last year, it was significantly below that. What they've recommended here is pretty consistent with what they had recommended in the BG&E case. So we see this, in general, as a positive. There's some adjustments that were made by the staff, that certainly we'll take exception to in our rebuttal, that we believe are inconsistent with the commission order last time, such as eliminating cash working capital and making some other adjustments. Which total -- the total of those is $12 million or more. You can quickly get up to the $40-million -- north of $40 million range as a starting point, if you will. So we're encouraged by that.

As it relates to the GRC, the staff did not endorse the undergrounding element of the GRC. They -- the feeders and the accelerated trimming was something that they were not opposing. All the other intervenors opposed the GRC. I would like to note that the Maryland Energy Administration, the MEA, and there's a -- the MEA was the one that really spearheaded the governor's task force on reliability in Maryland. They filed testimony, in general, in support of the GRC. They encouraged to look at the undergrounding, as far as from a cost benefit. But they acknowledged that what we had included in our proposal was, in general, consistent with what was in the task force report.

With that, as far as the other -- the Delaware Gas, our ask is about $12.2 million. And there is now a procedural schedule, it wasn't available when the slide was put together. So intervenor testimony is due June 3 for our -- for the DPL gas case.

In New Jersey, that filing, we requested a little over $70 million. The intervenors are to file their testimony on June 21. And the big issue there is the consolidated tax adjustment. We've talked about this in the past. What was proposed by a rate council in New Jersey, in our last cycle, was almost a $400 million, I think it was, reduction in rate base. Almost 40% of rate base. So you can imagine how difficult it is to really get to what we consider a fair settlement when we're dealing with that. So that's something, we're encouraged that this generic hearing has been set up. We view that as a positive and a recognition how significant this issue is, and we'll be moving forward on that. Certainly, with an expectation that we'll be able to get to a reasonable outcome there, so we can have a shot of earning a fair return.

Under the -- in DC, we just filed, last week, in the district, asking for $52 million. And we'd expect this case to be resolved here, as I said, within 9 months, before year end.

Turning to FERC. Our FERC rate is -- our base is about 10.8% and then we add 50 basis points for being in on RTO, making the base rate 11.3%. And you can see the rate base there, that -- our 2012 estimated year end rate base. So about $1.3 billion of that is subject to the 11.3%. We also have an incentive rate which adds another 150 basis points for certain projects, which included the MAPP. You see we identified the MAPP, and then non-MAPP related, which is about $200 million. It provides some projected revenues or earnings associated with that.

I'm sure you're aware, in the last -- at the end of February, there were a couple of events that occurred as it relates to FERC, for us. One of which was a complaint filed under Section 206, which challenges our ROE that we're allowed to apply in FERC -- I mean for our transmission investments. As I said, our base rate is 10.8%. This challenge, which was brought by all of our jurisdictions, and also by the consumer advocates in each of our jurisdictions, is proposing a base rate of 8.7%. Now the burden of proof lies with the complainants in this, and we'll certainly be opposing this vigorously. A 2% reduction in our allowed ROE equates to about $15 million. I see, here, we have 1% as $7 million, so 2% is about $15 million. They also, in the complaint, wanted to change the -- or challenging the protocols. And as far as how the filing goes, which provide them, each time we file, more of an opportunity to challenge various components, if you will, embedded within the FERC formula. We'll be filing a -- as I said, we'll be opposing this and making a reply filing, here, in the middle part of April.

The other event that happened with -- at the FERC level is the FERC commission issued an order at the end of February, as related to our MAPP project. If you'll recall, with our MAPP project, PJM has -- no longer includes this in their RTEP process. So this has been excluded. We -- under the order that we had, it allowed us, in that event, to get recovery of these costs through an abandonment filing. We made an abandonment filing for about $88 million worth of investment that we had there. Under the order that came out -- a positive of the order is they acknowledged that the -- that we should be allowed to recover this, these costs, and it'll just be subject to a prudency review. However, they did eliminate about $2 million worth of cost that we had incurred, I'd say, prior to the original order -- incentive order for the MAPP project. They also -- we had in our filing included an earnings rate of 12.8% at the incentive rate that was associated with the MAPP project. And what they have said is that we should apply the 10.3% rate instead of the 12.5% rate.

Going to the next slide. As far as decoupling, and as Dave alluded to this briefly, about 2/3 of our load or sales, if you will, are decoupled in Maryland and in the district. And then Delaware and New Jersey, decoupling has not been adopted in Delaware. I'd say it's on hold at this point in time. So we're not anticipating that changing here in the next 12-month period.

So in summary, from the regulatory perspective, I'd say we're in this for the long haul. From my perspective, from our perspective, it's certainly a frustration level, as it relates to the regulatory lag. We feel like there are solutions out there that can deal with that. Obviously, there are solutions out there that can deal with it, and still provide the commissions an opportunity to come in and do a prudency review. When we talk about trackers, a lot of times there's concern about, well, the company's just going to get a -- go spend money, it's not going to get looked at or the intervenors may not have an opportunity. But, certainly, there's mechanisms out there that allow for the prudency review by all parties, and the commissions can take a look at that. So we are encouraged with the reliability. We feel like the tone has changed and we think or are hopeful that we're going to have much more positive outcomes this year.

So with that, let me open up to questions.

Unknown Attendee

Two questions. First, on the lag. I think as you said earlier, you calculate the lag currently at around $0.31 per share after-tax. Can you remind us how much lag is baked into your '13 guidance currently?

Frederick J. Boyle

Well, as far as any lag in there, we don't disclose our assumptions around regulatory outcomes that are embedded within our guidance. So I couldn't really point to a specific number that's embedded there. Now at $0.31 a share, if you look at where we were before, certainly we'd be -- based on $1.21 last year, and if you back out say the leases, you would be above the -- you'd be up and about $1.35 or $1.40 that time so elimination of lag is not there.

Unknown Attendee

Okay. And secondly, on the FERC, can you remind us how much of a rate increase is expected this year? I think you said $40 million went into effect June of last year. And then on the Section 206 filing. When would you would expect to have resolution on that?

Frederick J. Boyle

That could go on, the 206 filing. We'll file our reply to that, and that could drag on for, I think, well over one year. Would I be correct, Kevin? Yes? And then as far -- your the other question was around the...

Unknown Analyst

How much of a rate increase on the FERC transmission should be coming in 2013?

Frederick J. Boyle

I don't have that number right there. I'd have to go back. The slide that did show the increase in earnings, which I think was around $8 million increase in earnings, year-over-year.

Unknown Executive

[indiscernible]

Frederick J. Boyle

$7 million, sorry, increase in earnings year-over-year. So that would give you an indication.

Unknown Attendee

I just want to make sure I understood. If you eliminated all your lag, you're saying the earnings power of the company is $1.35 to $1.40?

Frederick J. Boyle

If we eliminated -- I didn't quite hear you.

Unknown Analyst

All your regulatory lag, the earnings power of the company is $1.30 to $1.40...

Frederick J. Boyle

What I was saying is, if we eliminated lag associated with the rate base that's shown on Slide 5, that would be worth about $0.31 a share. Now there's already going to be some lag because some of those have average rate base. So if you looked at rate base today, it's going to be higher than the rate base that shows there, to the extent there's average rate bases and depending on how the forward-looking additions are treated.

Unknown Attendee

But just to understand, with parent expenses, if everything was going as you had hoped, the base earnings power is about $1.35. I mean, I just want to make sure I understand that.

Frederick J. Boyle

Yes. What I was saying is, from a lag perspective, looking at the rate bases in the most recent filing, it'd be worth about $0.31 per share.

Unknown Attendee

Okay. And just on the O&M again. I know, I keep asking about that. But in your rate filing, about 1/3 of your filing is from higher O&M cost.

Frederick J. Boyle

Yes.

Unknown Attendee

So that doesn't incorporate the savings for this year because it's a historical test year. Is that correct?

Frederick J. Boyle

What that's looking at -- your O&M cost there are based on what's on the test period versus what was in your prior authorized rates.

Unknown Attendee

So the savings for this year are not incorporated...

Frederick J. Boyle

The test periods here are based on 2012 actual, so that's what's reflected.

Unknown Attendee

But the savings are not in that, obviously. So that would trued up next year? Is that how that would work...

Frederick J. Boyle

As we move forward with any filings, then you're going to have -- the ongoing O&M will be just one of the many elements embedded in your next filings.

Unknown Attendee

It's Fred [ph], and I don't know if you can pull up the slide, to Slide 5. Just going back and looking at the math on the estimated return on equity annualized in 2012, rate orders against rate base. This is using the rate base numbers that are associated with Slide 7. As far as it relates to the requested revenue increases for the cases you'll file for 2013, is that correct? Is this to be the ROE based on 2012 earnings...

Frederick J. Boyle

I think what you're asking -- it's using the rate base that's embedded in our current filings, which we show on Slide 5. Which I guess, by definition, would also then be the revenue associated with the revenue request that's reflected on Slide 7.

Unknown Attendee

Okay. So this is the forward rate base...

Frederick J. Boyle

It does have forward additions in there because our filing included that.

Unknown Attendee

And the ROE is a function of the 2012 actual, plus an annualized run rate of rate increases you had in '12?

Frederick J. Boyle

That's correct.

Unknown Attendee

So any sort of volume growth or top line growth that you would have had in '13, because a customer growth in decoupled states or volume growth in non-decoupled states would be make this actually realized ROE look higher than what you're showing here. Is that fair?

Frederick J. Boyle

I'm not certain I'm following that...

Unknown Attendee

You have a baseline, 2012 earnings power, plus a revenue step up annualized which you didn't capture in 2012, I guess, in 2013 rate base. So if you had any revenue or any earnings growth in '13 versus '12, because of customer growth or top line growth, that's not getting captured in these earned ROEs?

Frederick J. Boyle

That would cut in to the -- I believe that would cut into the earned ROE. Some of the incremental growth that's not embedded in here because this is based off of 2012, the rate cases that we filed there. I may have to get with you and clarify that.

Unknown Attendee

And then on the -- if you look to Slide 7, you showed $196 million of requested revenue increases relative to the $130 million revenue gap you showed on Slide -- you talked to on Slide 5, how much more would be expected out of those next 2 cases? To think about how much of the deficiency or the revenue increases catching up on earned ROE versus revenue required for future investment.

Frederick J. Boyle

Well, when I -- as far as the forward-looking information, I identified that embedded within this $195 million ask is about $45 million associated with 2013 adds. So I don't know if that gets that to your question as far as what the increment would be. In other words, right now embedded in the rate base that we included in our most recent filings, we've included additions that go out through the end of '13 for reliability, and the impact of including those additions versus not is approximately $45 million.

Unknown Attendee

Last question. If you think about our base and the mechanisms that are in place, there hasn't been a change in D.C. Maryland is still trying to figure out forward test or not forward test [indiscernible] we're not particularly aggressive on. How much structural lag do you guys have in your earned ROEs just based on the historic rate case filings structure you have now, even if you've got everything you asked for? Because the reality is that you're always going to be behind? But how much...

Frederick J. Boyle

Well, the reality is, we're always going to have some lag. The exact percentage, I don't have a number for you as far as what the exact percentage would be. If you look at our rate base, it's growing at about 8% a year so you're always going to -- barring some forward-looking treatment, you're always going have some lag built in because of that 8% growth.

Unknown Attendee

So that will be about 100 basis points, you're probably talking 150 would be a good outcome?

Frederick J. Boyle

150 would be a much better outcome than where we sit today.

Okay, with that, I'll turn it over to John.

John U. Huffman

Thank you, Fred, and good morning. I'm delighted to be here to review Pepco Energy Services, or as we call it, PES. Let me just go through this. I've provided a fair amount of detailed information. I'm not going to cover every bullet, just going to touch on the highlights. And as you think about Pepco Energy Services on an ongoing basis, you can really think about it in 3 basic groups.

First is our ESCO business, where we design, build and operate energy efficiency and Combined Heat and Power, or CHP projects for primarily government and the large institutional customers. The second area of our business is our thermal business, where we own and operate a thermal system in Atlantic City, and we provide steam and chilled water to various casinos and hotel customers. And then finally, the third area is our underground transmission and distribution construction business, serving utilities that we operate through our W.A. Chester subsidiary.

So as Joe mentioned, 2012 was a tough year for PES as the energy efficiency market proved to be quite challenging. The significant downturn in the state and local government markets, which is the largest market segments for the industry, impacted all ESCOs, including PES. The key driver has been really weaker government balance sheets, which have made these customers more cautious and more reluctant to incur additional debt that's associated with energy efficiency projects. The net result, as you can see by that chart, is that our contract signings in 2012 were well off the pace of our recent history. And to put this in perspective, you'd really have to go back to the 2001-2002 recession to find comparable market conditions.

So recent actions that we've taken have set us up to really turn the corner in 2013. And in response to these challenging market conditions, as Joe mentioned earlier, we made significant adjustments to our ESCO business and organization in the latter part of 2012. The net effect is that we reduced ongoing operating expenses by roughly $8 million on an after-tax basis. That represents about a 30% reduction in the cost structure in this business, and we're going to see that impact in 2013. So even with expected continued softness in the energy efficiency market, our lower cost structure will enable us to earn roughly $5 million for the ongoing businesses this year. And that's up from basically breaking even in 2012.

So as we begin to turn the corner this year, and we look to 2014 and beyond, we expect that the state and local government markets will recover as the economy improves. In the meantime, we're seeing positive signs in the federal government market segment. Activity has really picked up significantly here over the last year. And we've been especially encouraged by 3 recent project awards, the first one is under the DOE and U.S. Army Corps of Engineers contracting programs. This represents an expansion beyond our historical involvement in the GSA utility savings programs. So we expected that these projects, as well as others that we're working on, will turn into signed contracts in the latter part of 2013 and 2014.

And in terms of budget sequestration, which has been in the news quite a bit here, we actually expect that to help our federal business. The Army and other federal agencies are directing their facilities to use energy performance contracting, the kind of contacts that we use, as a way to cut costs and the deal with the budget sequestration measures.

We're also seeing increased market opportunities in Combined Heat and Power. The construction of our 15-megawatt CHP project for DC Water is on schedule. We are developing and currently in the design phase of another CHP project for a federal agency. And we're laying the groundwork to develop additional CHP projects targeting federal and other customers. Low gas prices, federal and state incentives, as well as recent EPA rules dealing with boiler emissions, are all expected to drive growth in this CHP market.

Through our W.A. Chester subsidiary, we're seeing growth as well in our underground transmission and distribution construction business. W.A. Chester is an industry leader in installing underground pipe type cable systems, one of 2 technologies that are commonly employed by utilities. It's really driven by the utility's need to improve reliability, as well as other factors. Spending on transmission projects, including underground, is expected to grow over the foreseeable future. And specifically, we expect to see increased projects for not only new T&D underground projects, but retrofitting and upgrading existing lines as well.

In terms of the retail supply business, we do plan to accelerate and complete the wind down into this year into 2013. We are currently evaluating different alternatives, what will likely happen is that we'll sell some of the remaining retail contracts to other marketers. With the remaining, we'll just simply terminate directly with the -- our existing customers. The fact that these -- all of our remaining retail contracts are well above current market prices. This, we believe, is a very achievable approach. And we are -- any impacts to the -- from the retail supply business, we have excluded from our 2013 earnings guidance.

So in summary, while we navigate the current downturn in the ESCO market, it's important to remember that the long-term fundamentals of energy efficiency remain in place. We expect that this business will regain momentum in 2014 as we begin to implement additional federal projects. And as the economy improves, we expect the state and local governments to return to more historic levels.

And finally, we also expect additional growth to come from our underground T&D construction business, as well as our CHP business, all combining to provide important incremental earnings to PHI. So with that, I'm happy to take any questions.

Noah Hauser - Barclays Capital, Research Division

John, is the expectation still that the ESCO business should make about $5 million a year? I know in '13, that's what you were saying, but '14 and '15 and kind of beyond and it will grow the GDP or something? Is that still -- I think that's the language used when you revised down the expectations.

John U. Huffman

Noah. Can you repeat, I didn't hear your question.

Noah Hauser - Barclays Capital, Research Division

Yes. Do you still expect PES to make about $5 million a year '14 and '15 and beyond?

John U. Huffman

Oh, I see. 2013, it really all depends on how quickly the market recovers in the ESCO business and the kind of growth that we can achieve in our other businesses. So for now, we're not making any -- we're not providing any kind of long-term guidance beyond this year. But as we move forward, we'll certainly keep you posted.

Noah Hauser - Barclays Capital, Research Division

Okay. And then as far as the backlog kind of slide that you guys have, there is a step down, I think, '14 like kind of $6 million, $7 million, and then also in '15 as well. So is there like additional flexibility on the cost side where you guys can manage?

John U. Huffman

Sure, sure there is. We do have additional flexibility. But our expectations are that we'll sign additional contracts to fill in the remaining gap.

Okay, if there are no further questions, I'm going to turn it back over to Fred. Thank you. We have one more. Okay. No, we don't. Okay. Thank you.

Frederick J. Boyle

Okay. Hello, again. I'll talk about the financial overview. First of all, as far as our key objectives, it's about earnings growth in the dividend. And earnings growth comes from, from what, that's going to come from, again, the unlocking the value that we have embedded in our lag today. And we just talked about that. And in addition, all those things come together to try and help us, and our goal is to maintain a strong balance sheet.

This slide shows the projected CapEx. Dave has spoken about this, where we expect to spend about $1.2 billion a year over the next 5 years. You can see here the breakout of that from between distribution and transmission and there's other detail back in the appendix as it relates to this. What's the impact of that capital spend? The impact is the growth in our rate base. It's about 50% over the 5-year period based on this spend. And you can see that both the transmission and distribution, transmission is growing at a slightly faster pace, but both of them are in the 50% range.

As far as our credit profile, right now, we're soundly within the strong reinvestment grade, and our goal is certainly to stay there. The debt-to-capital that you see in the top box there on the left, where it shows the 2012 actual at 58%, if we had settled the equity forward during 2012, that number would've been right in line with our long-term target metrics.

Going to the -- our liquidity. We believe we have a very strong liquidity position. We extended our credit facility by 1 year, it now goes out to 2017. There's a note on here regarding the impact of the cross-border leases. I'll talk about that a little bit more later. I know that that's a topic there's a lot of interest in. And as far as the impact of the unwind, we did make a deposit here within the past month of about $240 million to the IRS associated with the change with that ConEd decision and our evaluation of our position with the IRS. And that was funded through a short-term debt. As we look at our 2013, and our financing plan associated with 2013, we expect to issue about $750 million to $850 million worth of debt. We just completed last week a $250 million facility at Pepco, 30 years at 4.15%. So we're very pleased with that. Going through the end of the year, we anticipate we'll be making some incremental issuances at Delmarva and Atlantic City as you can see there.

We settled the equity forward at the end of February for $312 million. We issued approximately 18 million shares. And we have the ongoing dividend reinvestment, which is somewhere around 2 million or so shares a year. Again, you could see highlighted in the blue box at the bottom of that slide, that the unwind of the cross-border lease will have an impact on when we issue equity and will impact our debt plans too. But as far as equity, as we noted on our earnings call, we do expect that to be at least beyond 2014.

This is a chart of our projecting the maturity of our debt facilities. You can see actually 2013 is the most significant year of maturities. But it's a very manageable plan. We like the profile that we have, and we don't see any issue with our ability to execute.

Going to our cash flows for 2013. Some items of note here. You could see there on the cash flow page, the equity forward of $312 million, that there's incremental short-term debt. On here, we used $280 million, that's the midpoint of the range we showed on the financing slide earlier. In addition, you'll see on here that we made a $60 million pension contribution earlier this year. Last year, we had made a $200 million contribution. This year, we made a $60 million contribution during January. And you'll also see here on this slide the impact of the tax payment that we made of $242 million. Again, the impact of the lease unwind is not reflected on here and I will touch on that further.

As far as pension plan itself, a couple of years ago, we went to a liability-driven investment approach for our pension plan. So under that strategy, currently, we have about 62% of our assets are invested in more fixed income or fixed income investments. You could see here the decrease in our expense of about $8 million that we expect for 2013. And in general, I'd say we're pleased with the funding level of the pension plan. We're at about 85% funding right now. And if you look at just the pension plan alone, without the serve [ph], it's pushing in the upper 80%.

As far as our cash tax summary, with the outcome, as it related to the cross-border leases, the reason we were able to reduce the amount of the tax payment versus what we've talked about before, that if we lost 100% of the cross-border leases, that we'd have to pay somewhere in the neighborhood of $600 million of tax. And then we'd have another $150 million of interest on top of that, while the payment we made was $240 million, as I've noted. So the reason for that is we were able to take advantage of some net operating losses and other tax attributes that are embedded within the system to reduce that payment.

Looking forward, we do expect to have a net operating loss going into '13 and into '14, which is going to be driven by the bonus depreciation expense in 2013. However, at this time, as we're looking beyond 2014, we do not expect to have any NOLs at that point in time. This assumes that the bonus depreciation is not extended beyond 2013.

As it relates to the cross-border energy lease, this is -- the cross-border energy lease is our legacy investments. These were made between 1994 and 2002. During the 1990s, the IRS looked at these leases and didn't take exception to any of the deductions. It wasn't until our 2001 return when the IRS started to challenge these deductions, and not just for us, it became more of a, they call it, an industry. It's not unique to the utility industry, but it's more of a global issue, if you will, for the IRS. We subsequently filed then in January of 2012 for 2001 in 2 years in the Court of Claims, at prior to our filing, Consolidated Edison had received a favorable ruling in the Court of Claims, which the IRS then appealed. And as you're aware during January of this year, the federal appeals court, Circuit Court of Appeals, overturned that lower court ruling and held that the tax deductions and -- just the benefits that are associated with these leases are not allowable. So this then triggered us to do an evaluation, working with our outside advisers, as far as the likelihood of success for us to continue our litigation of these leases. And the view was that it was no longer more likely than not that we would be successful. So all of that, from an accounting perspective, means in the first quarter of this year, we'll be taking a charge of between $355 million and $380 million. So you'll see that in our 10-Q for the first quarter.

As we look forward, we will, and are evaluating unwinding the leases, so I would expect that it will unwind some or all of the leases this year. As I mentioned before, we've talked about, in the event of an unwind, we should be able to get somewhere in the neighborhood of about $750 million. So as far as the impact of that then, as we look forward at our financing plan, if that happens, so it's not definite is going to happen but just to give you a few view for the scale, if that occurred, we'll pay off the short-term debt of $240 million or $250 million, I think it is actually, that we have associated with the tax payment, which would then leave about $500 million which, as we look at that, we'll evaluate our future debt issuances. But from an equity perspective, as I say, that would push it at least beyond 2014, and quite possibly, beyond 2015 before we need to issue any significant equity.

Going to the dividend. Our dividend yield is 5.3%. And as Joe said, we're committed to the dividend. I know you've all heard that, but we view that as a key element of value that we deliver to our shareholders. The least impact on the payout ratio, we've received questions on that. With the lease income going away, that's approximately $0.12 per share. So we're going to have a high payout ratio. If you look at our range, the low end of the range actually is below our dividend. However, we believe we will be. We've talked about the regulatory lag. As far as our need for equity, looking forward, we think we'll be able to earn our way back into what it was for us, but there's a goal of having a payout ratio that's more in the 70% range. That's not going to happen overnight but we believe we will work our way to that.

As far as the earnings guidance, reaffirming the earnings guidance, we talked about on the call, at the end of February of $1.05 to $1.20 per share. This excludes PES retail, and it also excludes any impacts of the cross-border lease and any interest and things associated with the cross-border lease, in addition to what the normal kind of items that we've excluded in the past.

This slide shows a bridge going from our $1.21 of adjusted ongoing earnings in 2012 over to 2013. You could see some of the main items. We've talked about in the O&M here, Dave's highlighted that. That's worth, we estimate, about $0.10 a share. Annualizing the 2012 rate cases is about $0.10 a share. On the downside, you see over in the second last on the right, the negative $0.12 associated with the leases, and then the dilution associated with the equity forward, the 18 million shares from the equity forward, in addition to the impact of our ongoing DRIP plan, which is about 2 million shares. But that ends up being about $0.10 per share. And you can see some of the other key items there, tax adjustments, et cetera, from '12 that we've eliminated moving over to the right to give us our range. Certainly, one of the big drivers within the range and where you fall, goes without saying, is going to be the regulatory outcomes.

The next couple of slides talk about some of the key assumptions we have embedded in our guidance range. And I think Dave has -- I think he was talking about the O&M and some of these items within his presentation. And John mentioned the $5 million that we're assuming for PES for 2013 from a PHI perspective. Again, we're excluding the leases. One item of note here, is you'll see the effective tax rate there is approximately 40%, which is higher than what we've had in the past. That's being driven by the leases going away. There were some permanent benefits, if you will, associated with the leases that reduced our effective tax rate in prior years. So that's the main cause of that increase.

So with that, in summary, as we're looking forward, we believe we offer strong stable earnings, that there's good growth opportunity embedded in our earnings. We're committed to the dividend, and the dividend provides significant value right now with that payout ratio up at the almost 5.5 -- not payout ratio, the yield at about 5.5% rate. And we have a strong team and we're committed to moving forward and solving this regulatory lag issue. With that, I'll take any questions.

Unknown Attendee

Frederick, are you done litigating the cross-border lease? Are you good going to continue litigation and there's potential upside here?

Frederick J. Boyle

Right now, with the cross-border lease, as far as the litigation itself, it's more -- I view it as a more of a kind of on a stay right now. So we're going to evaluate whether to continue pursuing that litigation and/or try to pursue a settlement with this service.

Unknown Attendee

And beyond the $242 million that you've already paid, what's your liability?

Frederick J. Boyle

Well as far as that, that is 100% of the liability associated with those leases. Now when we do, when we actually do unwinds if those occur, there will be some incremental gains and losses, but there's not going to be -- it's not going to trigger any significant incremental tax payments.

Unknown Attendee

And just to stay on the leases, the $700 million in proceeds, is that from collateral that comes back or is that from the actual possible sale of the assets?

Frederick J. Boyle

This will be traditionally, as you may recall, over the past 2 years, we've actually early terminated a couple of the leases. And that's with through discussions with the lessee negotiating a price. But certainly, the collateral value is a key element there in looking at what the value of that collateral is.

Unknown Attendee

And how much collateral are we talking about, is that the total amount or...

Frederick J. Boyle

Well, historically, when we've talked about what our expectation is from this, we would view the amount of the collateral is certainly a key data point in making that evaluation. We haven't specifically disclosed what the collateral is.

Unknown Attendee

Got it. And I apologize for the follow-up, but -- and that's after-tax proceeds that we're talking about, the $700 million?

Frederick J. Boyle

Well, really, if you look at the -- when you say after-tax proceeds, the tax payments that's been made, the $240 million. So as far as any incremental tax associated with, there will be some tax gain or loss associated with an unwind, but we don't expect there'd be significant incremental tax at that point in time. In other words, we've taken the hit, so to say.

Unknown Attendee

A couple of questions. One on the dividend and you guys have been emphatic for a while that it's secure, $1.08 per share. I'm wondering, is there any scenario in this 5-year plan that you've laid out which would cause you to reconsider looking at the dividend? I mean, are you assuming that bad rate case outcomes, what have you, all of that still insulates you on the dividend? Or...

Frederick J. Boyle

As we look forward right now, we don't see a scenario where we we'll be cutting the dividend.

Unknown Attendee

And on the equity need, to be clear, in that 5-year plan, you've said no equity in '14, perhaps not even '15. So if you think of that whole plan, the $5.9 billion in one holistic perspective, should we think that there is probably one additional round of equity raise that you'll do over that 5-year period to fund it? Or are you thinking this could require multiple or a couple of equity raise?

Frederick J. Boyle

If you're going out for a full 5 years, it's fair to assume that there's going to be incremental equity. Prior to the lease situation we had said, we expected something probably at the latter part of '14. And what we're saying now is, depending on what happens associated with the lease unwind. So there's still a story to be told here, right, with that. But depending on what happens there, we think we should be able to push it out beyond '14 and possibly beyond '15 before we'd need significant incremental equity to go to the market.

Unknown Attendee

And that would cover the entire program to '17 [indiscernible]?

Frederick J. Boyle

I'm just going out that far. As far as the whole program, we haven't gotten into that.

Unknown Attendee

The last question. I think you said that dividend payout comfort zone would be around 70%. As you look at the execution of this plan, can you give us some sense of when you would expect that you would be in that position over that 5-year period?

Frederick J. Boyle

Right. And as you know, we don't provide any forward guidance, we only provide guidance for '13. So as we're looking forward, you can see the growth in the rate base. We talked about upside from cutting into regulatory lag and we've talked about the equity here. So we think we will work our way to that. It's not going to happen in a couple of years, but we think we will get there.

Maurice E. May - Power Insights

Looking ahead, if that Maryland rate case outcome is not all that good, it becomes kind of the canary in the mine as far as regulatory lag going forward. How could you -- how far down could you reassess your $5.9 billion capital expenditure program? In other words, what is your annual depreciation or what would be your cumulative 5-year depreciation? And could you ever get your capital expenditure program down to your forecasted 5-year depreciation?

Frederick J. Boyle

Well, as far as -- right now, our CapEx -- I'm not certain if you have it there or not, I know it's a multiple of what our current depreciation is, so I don't have that. I couldn't say specifically whether you could actually get it down to that level, I guess getting at whether you could get it to a level where rate base isn't growing.

Maurice E. May - Power Insights

What was depreciation last year, for example?

Frederick J. Boyle

I think it was 4...

Unknown Executive

[indiscernible].

Frederick J. Boyle

Okay. Do you have the number?

Unknown Executive

[indiscernible]

Unknown Executive

on Page 5 of Joe's presentation. Cumulative -- on Page 5 of Joe's presentation. It's the cumulative depreciation for the 5-year construction plan of about $3 billion. So on Page 5, Maury. If that's what you're asking, it's the cumulative depreciation over that 5-year period.

Frederick J. Boyle

I guess if you actually -- and looking at that, Maury, you'll see there depreciation and the CapEx shown there on slides, was it 20 to 22?

Maurice E. May - Power Insights

Okay. I don't see the -- Page 22 of what? Whose presentation?

Frederick J. Boyle

Of the finance overview.

Maurice E. May - Power Insights

You've got me confused here.

Frederick J. Boyle

I'm good at that. Let me see. Right, if you look at the screen, these slides that are in the appendix.

Maurice E. May - Power Insights

Okay.

Frederick J. Boyle

So on the left side, you can see the depreciation expense.

Maurice E. May - Power Insights

Okay. So it looks like depreciation over the 2013-2017 timeframe is upwards of $1 billion.

Unknown Executive

That is Pepco.

Frederick J. Boyle

This is just Pepco. We have each utility separate. I don't -- Pepco was in here.

Maurice E. May - Power Insights

Okay, so if Pepco is half of your company, you look at a couple of billion dollars of depreciation. So I guess I'll get back to my original question, can you yank $5.9 billion down to your level of depreciation which seems to be around $2 billion to reduce regulatory lag?

Frederick J. Boyle

As we alluded to before, first of all, we think we're going to get constructive outcomes here. So as far as the need to chop that drastically, I think it's very premature for us to make comments along those lines because we certainly don't think that's going to be the situation we face.

Maurice E. May - Power Insights

Just 2 more questions. Just on the leases, what's the timing you think that we can get something done?

Frederick J. Boyle

As we're looking forward, we'd expect that we ought to be able to resolve the lease, if they're going to be online within a 12-month period, hopefully by year end.

Maurice E. May - Power Insights

Great. And just on the dividend, and you're very clear that you're going to continue to pay your dividend. I guess I'm just trying to understand the dividend relative to the regulatory lag. And I guess you could kind of go back a couple of years, if that dividend would've been reduced, let's just say, in half, that could have saved you, I don't know, $0.10 a share in financing cost that's kind of going through the various different operating companies, which is about 1/3 of your lag. So can you kind of just reconcile that? Because you said under no scenario, but if you don't continue to get -- it seems that one way that you could reduce that regulatory lag and improve your earnings is by, especially with this large CapEx, you'd kind of look at some other companies like Wisconsin Energy and they kind of held their dividend back until they were done with their CapEx program and then, it was able to really grow the dividend and buy back stock.

Frederick J. Boyle

Right. But as we've said, we've -- we're committed to the dividend so we don't see any scenario where we'll be reducing the dividend. The investment that we're making at the utilities, which is where you have the lag, that investment isn't a function of the dividend. So you're still going to make that investment, we're still going to maintain at the utilities. Our goal is to maintain about a 50-50 debt equity. So you're still going to have the same lag situation as it relates to that.

Maurice E. May - Power Insights

Frederick, just a point of clarification. We had showed that leases you're going to get tax benefit to offset whatever obligations you'd have so you'd get the net cash outcome unwinding the leases. It looks like a decent chunk of that is coming from bonus depreciation, related NOLs rather than NOLs from historic losses or something along those lines. Are the deferred tax adjustments because of the bonus depreciation captured in the rate base numbers you guys show in your filings right now, are those get adjusted in the next rate case once you actually affect the bonus depreciation number?

Frederick J. Boyle

It would be as we roll forward because the -- we haven't settled yet with the IRS. So as far as any of the cash settlement associated with that, once that flushes through, then the impact of the -- at the utility level would flush through. So that would be to go back to where you were saying, it probably be in the next round depending on how the settlements work out.

Maurice E. May - Power Insights

And the sizing of that, just numerically, I mean...

Frederick J. Boyle

I don't have that number. That would be something we'd need to follow-up on.

Maurice E. May - Power Insights

Okay. And then on the CTA going back to New Jersey, we should have asked earlier, but what is the process exactly to address that and what is your confidence that gets resolved before this current rate case gets resolved? Or is it the potential that you guys are going to fight over CTA even as this process is going when we try to resolve it?

Frederick J. Boyle

I think there is the prospect that we will be fighting over, that will be an element, let's say, of any settlement discussions we have. So I don't and I'm not sitting here expecting that the generic hearing will be resolved before -- unnecessarily before any, if it's a fully litigated base rate case in New Jersey, that the generic will be completed before then. Certainly, our goal is to reach a settlement, and the sooner the better, as it relates to New Jersey. Regarding the timing of the generic hearing, I believe in the past, we at the New Jersey Commission, put out a letter requesting -- the utilities say there were 4 questions associated with that, and I think responses are due May 5, first week of May, I believe it is. And then the questions are along the lines of, first of all, do you believe there should be a CTA? If there should be a CTA, how should it be calculated? What was the impact, I believe, is one of the CTA in your, say, recent rate cases? I don't recall the fourth. I don't know, Kevin or anybody may.

Unknown Executive

[indiscernible]

Frederick J. Boyle

So anyway, there's a brief letter out there. And the commission indicated that once they get these responses back, they'll set up a procedural schedule. So right now, there's not a definitive timeline associated with the generic hearing.

Okay, Joe do want to make...

Joseph M. Rigby

Thank you. Okay, well hopefully, we've covered a lot of ground and covered most of what was on your mind. But before we move to the closing, I'd be happy to field any other questions you might have on your mind.

Ali?

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

As you are embarking on your strategy and very clear on the focus, et cetera, as you look at your portfolio of utilities right now, do you see them all integrated as one core portfolio that Pepco has to own interconnected? Or is that a scenario depending on your rate case outcomes and your efforts, if you're not getting the right response back that maybe you could consider relooking at that portfolio and deciding maybe you don't need to be in all of those states that you're in currently?

Joseph M. Rigby

We obviously manage it as a Power Delivery business and through the service company. It -- we try to take advantage of the efficiencies of having, I'll say, kind of an -- like an umbrella approach over the 3 operating -- on the 3 opcodes. Candidly, we don't spend a lot of time thinking about how you might disaggregate that or peel one off. So I would want to maybe communicate to you that that's not real high up on the list of an alternative to try to pull one out. Now having said that, we're always going to do the right thing as we see it in the long term for the company, for the customers, for the investors. But I wouldn't want you to think that that's something that's we have high up on the list of alternatives.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And one other question. A year or 2 back, there's a lot of excitement about MAPP that was supposed to be a pretty large high-growth project. That unfortunately, didn't play out. But is there anything proactively that you can be doing or are you looking at opportunities that have similar transmission, kind of opportunity might crop up on your radar screen? Or is it really a function of just the market dynamics and not really in your control?

Joseph M. Rigby

There are a variety of alternatives that we're considering. I -- just in looking at what's evolving around us. For example, if -- just to give you an example, the offshore wind legislation coming through in Maryland, what does that mean relative -- if that was to go forward, what does that mean from a transmission point of view? And given the fact that we have all the right of ways that we had in place for MAPP, does MAPP then become viable, notwithstanding what might be happening from a load point of view? That's probably at the top of the list of what we would think about as an alternative. But that would be dependent upon, let's say, in that case, the offshore wind.

James L. Dobson - Wunderlich Securities Inc., Research Division

Joe, I wanted to go back one more time to the regulatory lag issue. I think as we rewind to maybe 2 or 3 years ago, you sold the generating assets to Calpine. That really put a laser focus on the regulatory lag. And I think when I rewind to 2 years ago in the analyst meeting, we talked about the tension, notwithstanding the dividend, between customers and investors. And I think your comments at that point were, while we really got to spend in order to improve reliability and improve the service to the customer, which clearly, you've done as evidenced by public policymakers' responses to the last storm. Yet that tension still exists. I think in one of the questions you answered when Dave was presenting, you look to this round of rate cases as being that sort of answer, if you will, good means good and bad means bad, which bad would then highlight that tension again. Did I hear you in response to that question say, it will be time to sort of throw down the gauntlet and make some changes and understanding, of course, this is webcast and there's probably some parties listening and this thing that might have some influence on the outcome?

Joseph M. Rigby

Why don't we ask them what I said?

James L. Dobson - Wunderlich Securities Inc., Research Division

I'm just trying to understand sort of where you are. And again, I think of it in that 2-year continuum, where having many of us would agree, 2 years ago, it was right to spend both O&M and Capital and keep it going, you've made progress. Now it seems like you do have to be a little firmer for investors in order to reduce that tension?

Joseph M. Rigby

Right. If we hadn't done what we did over the last 2 years, we wouldn't -- candidly, we'd be really in a tough, tough spot to go in and have the dialogue that were -- that's underway with the regulators. So the point I was trying to make earlier is that this is the -- certainly the best position that we've been in. And I think it's very reasonable for us to expect that we're going to be treated reasonably. And what I was also trying to communicate, I didn't use the term throw the gauntlet down. But clearly, we're commenting and sending a signal that, listen, if you're and the customers are telling us that this is what they expect, and that's pretty clear, that we're delivering and that's what they want us to do, it takes resources and it takes money to do that. And on a relative level, when we think about the value of electricity versus the cost of electricity, we quickly get to the conclusion that what we're proposing is in fact very reasonable. I think that the arguments and the information and the performance really backs up our position. If, for some reason -- and we believe that we'll be treated reasonably, but if for some reason we're not, I don't think it would be prudent for us or for me to stand here and say, we're just going to go in and file again. I think we have to step back and relook at what we're doing. It's not our intention to come here today, nor would we say we're going to reduce CapEx down to depreciation, we're going to slash and burn, that's not what we want to do. But we're going to have to take a look at things if the headwind is just the norm. And I hope that doesn't happen. But part of coming here today was to communicate to you that our thinking is -- where our thinking is and the thought process that's underway to consider alternatives. And that's where we are.

James L. Dobson - Wunderlich Securities Inc., Research Division

And understanding that rate case outcomes will give us a pretty good indication of how successful you're being. Standing here today, do you think policymakers and regulators are hearing you on that?

Joseph M. Rigby

I've had opportunities, Jay, even as recently as last week to go in to see Governor O'Malley and in that dialogue, which is kind of an ongoing dialogue that we've been able to position ourselves to have, whether it's with Governor Christie, in January, to talk about our plans, to Governor Markell, to talk about how we can be supportive of economic development, as well as the state of the company presentation that was provided at Delaware Public Service Commission, to the work that I'm doing with Mayor Gray on undergrounding, every dialogue we're having is to give them the information. The first piece of information I gave Governor O'Malley was same slide Dave presented, showing the improvement in reliability, and talking about what is the incremental impact on the customers' bill for us to continue to be able to do that. And relative to that cost versus the value, we think it's a pretty good deal. And that's what we want to continue to do. So I want you to know that part of executing this plan and part of my job is to be able to go out and have that ongoing dialogue, so that political leaders are positioned to be supportive of what we're trying to do here.

Frederick J. Boyle

Thanks, Joe. Okay. I don't see any other questions. Let me just make a couple of quick comments. First, I want to thank you all for joining us. Hopefully, you found this to be efficient for us to come to you. And I want to tell you, on behalf of the board and the management team, how much we appreciate your interest in PHI and for us to have a chance to have this dialogue. So thank you, very, very much. I'm very confident in what we've done, and I'm confident in our ability to continue to execute the plan. And we're going to look forward to seeing you all real soon. So thank you for being here and have a safe trip back. Thanks, so much.

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