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Executives

Donna Kinzel – Director, IR

Joe Rigby – Chairman, President and CEO

Tony Kamerick – SVP and CFO

Kevin McGowan – VP & Treasurer

Gary Morsches – President and CEO, Conectiv Energy

Analysts

Paul Patterson – Glenrock Associates

Reza Hatefi – Decade Capital

Dan Eggers – Credit Suisse

Ali Agha – SunTrust Robinson

Jay Dobson – Wunderlich Securities

Maurice May – Power Insights

Pepco Holdings, Inc. (POM) Q4 2009 Earnings Call Transcript February 26, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2009 Pepco Holdings Incorporated Earnings Conference Call. My name is Stephanie, and I will be your coordinator today. At this time, all participants are in listen-only mode and we will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to your host, Donna Kinzel, Director of Investor Relations. Please proceed.

Donna Kinzel

Thank you, Stephanie. Good morning, ladies and gentlemen. Welcome to the Pepco Holdings fourth quarter 2009 earnings conference call. The primary speakers on today's call are Joe Rigby, Chairman, President and Chief Executive Officer; and Tony Kamerick, Senior Vice President and Chief Financial Officer. Also available to answer your questions are Dave Velazquez, Executive Vice President, Power Delivery; Gary Morsches, President and Chief Executive Officer of Conectiv Energy; and John Huffman, President and Chief Executive Officer of Pepco Energy Services.

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

Also, please note that today's call will include a discussion of our results including certain items that we feel are not representative of the company's ongoing business operations. These special items and their financial impact are described in our earnings release dated today. The earnings release can be found at www.pepcoholdings.com/investors. Joe?

Joe Rigby

Thanks, Donna, and good morning, ladies and gentlemen. And thank you for joining us today. 2009 was a year of both successes and challenges. Our earnings were significantly driven by lower energy commodity prices and narrow generation spreads, pressuring Conectiv Energy's margin throughout the year.

Additionally, reduced demand for power resulted in lower run time for our generation fleet. At Power Delivery, as mentioned in prior calls, we incurred higher pension expenses as well as higher capital costs principally incurred to support growth in rate space not yet fully reflected in regulated rates. However, we made steady progress on our key growth initiatives most notably relating to our blueprint for the future and regulatory activities.

Consolidated earnings for the year were $235 million, compared to $300 million in 2008. In 2009, we realized after-tax gains of $24 million relating to the remaining balance of the proceeds from the Mirant bankruptcy settlement.

We also recognized an $11 Maryland state income tax benefit due to a change in the accounting – in the tax reporting for the disposition of certain assets in prior years. In 2008, we took charges to earnings totaling $93 million due to a change in our assessment of our tax position associated with our cross-border energy lease investments.

We view these items as not being representative of the company's ongoing business operations. Excluding these special items, earnings for 2009 would have been $200 million, compared to $393 million in 2008. Tony will discuss the financial results and our operating segment performance in more detail, including the results for the fourth quarter but first, I'll address some topics of interest.

Our vision of a smart grid is becoming a reality as we make great strides in implementing our blueprint for the future. Most notably in November, we began the full-scale installation of advanced meters for our Delaware electric and gas customers. The deployment has gone well and we expect to complete the meter exchanges for Delaware customers by the end of 2010.

The Delaware Public Service Commission has approved the creation of a regulatory asset to assure recovery of and a return on AMI related costs between rate cases. The U.S. Department of Energy announced in October that PHI had been awarded $168 million in federal stimulus funds to help finance the buildout of our smart grid projects in the District of Columbia, New Jersey and Pepco's Maryland service territory. The awards have allowed us to accelerate the building of advanced metering infrastructure, distribution automation and demand response technologies.

Late last year, the District of Columbia approved Pepco's request to implement AMI and to establish a regulatory asset to capture the costs related to the deployment. We expect meter deployment to begin during the third quarter of 2010 for our customer in the district.

Maryland has established an expedited process to address AMI, which we expect will conclude this spring. By accelerating the buildout of the smart grid, we can deliver the benefits of these technologies faster allowing our customers access to timely usage information and make firm choices on energy use, lower their energy bills and experience improved system reliability.

I'm also pleased that both the Maryland and District of Columbia Commissions have approved several demand side management and energy efficiency programs, which will help our customers reduce energy costs. The cost of these programs will be recovered through surcharge mechanisms.

Now turning to sales. We know our customers are focused on energy efficiency and conservation especially in light of the weak economy. Growth in the number of customers was about half percent, while weather-adjusted kilowatt-hour sales were down almost 2% as compared to 2008.

A portion of the impact of the lower sales was offset by the revenue decoupling mechanisms we have in place demonstrating the effectiveness of this rate design. With the coupling in place in Maryland approximately 40% of the distribution revenue was decoupled from consumption. With the addition of the implementation of a decoupling mechanism in the District of Columbia effective November 2009, approximately 65% of the distribution revenue is now decoupled.

A decoupling method was approved in concept by the Delaware Public Service Commission. We expect decoupling to be implemented for electric distribution in Delmarva Power's pending base rate case, implementation in Delaware would increase the percentage of decoupled distribution revenue to approximately 80%. A revenue decoupling mechanism is also under consideration in New Jersey.

2009 was a very busy year on the regulatory front with the filing of five distribution base rate cases and a decision received in the first of these cases. In Maryland, the commission approved an $8 million annual increase in Delmarva Power's electric distribution base rates effective December 2, 2009, based on a 10% return on equity. Note that the commission's decision generally reflected adherence to important regulatory precedence.

Four distribution rate cases are still pending. In May, Pepco filed a distribution base rate case in the District of Columbia requesting a $50 million annual rate increase. The decision in this case is expected shortly. In August, Atlantic City Electric filed a distribution base rate case in New Jersey reflecting a $54 million annual rate increase. If a revenue decoupling method is approved, the requested increase would be reduced to $52 million and hearings are scheduled to begin on May 24th.

In September, Delmarva Power filed an electric distribution base rate case in Delaware, seeking approval of an annual rate increase of $28 million. Delmarva Power put an annual rate increase of $2.5 million into effect on a temporary basis on November 17th subject to refund.

As permitted by Delaware law, Delmarva Power expects to place the remaining $25.5 million of the requested increase into effect in April, 2010, again subject to refund. Hearings are scheduled to begin April 15th with the decision expected in July, 2010.

In December, Pepco filed a distribution base rate case in Maryland requesting a $40 million annual rate increase. Hearings are scheduled to begin May 10th with a decision expected by late July of this year.

As we announced last month, we requested the Maryland Public Service Commission to suspend the procedural schedule in the proceeding for the approval of the Mid-Atlantic Power Pathway or MAPP project. This request was made to allow for the completion of PJM's annual regional transmission expansion plan, which evaluates the region's overall transmission needs. The study is scheduled to be completed this June and will determine any impact on the current 2014 in-service date for the MAPP project.

Our request was granted by the hearing examiner, while no formal proceedings will be held until June, work will continue to define the line's 150-mile route and to complete environmental studies. We have revised our planned capital expenditures for the MAPP project to reflect this delay in schedule. We expect to spend $24 million in capital in 2010 and $246 million in capital in 2011.

Before I leave the topic of MAPP, I would like to discuss our pursuit of federally backed funds for a portion of the cost of this project. Early in 2009, we submitted an application to the U.S. Department of Energy under title 17 of the Energy Policy Act of 2005.

Our application, which was accepted subject to due diligence seeks low cost funding in an amount of $684 million primarily for the Calvert Cliffs to Indian River segment of the MAPP project.

The total project costs remains estimated at $1.2 billion. We expect the loan or loan guarantee if received would be in place prior to the construction of the Calvert Cliffs to Indian River segment.

In addition to the MAPP project, we expect to spend $1.2 billion on transmission infrastructure over the next five years to improve reliability. Our transmission assets are subject to FERC jurisdiction and the transmission rates are set under a formula rate process. These assets earn a return on equity of either 11.3% or 12.8%.

We also expect to spend $3 billion on electric distribution, gas delivery and our blueprint for the future initiatives over this time period. These investments are aimed at improving reliability, meeting load growth, enhancing customer service and implementing AMI.

Now, I'll turn to our Competitive Energy businesses.

Conectiv Energy's Cumberland plant was placed in service on June 1st in Cumberland County, New Jersey. This 100 megawatt combustion turbine was completed on time and came in $3 million under budget. The 545-megawatt combined cycle Delta project in Southeastern Pennsylvania is within budget and is on track to become operational during the second quarter of 2011. These additions will enhance the value of Conectiv Energy's generation fleet, while providing needed capacity in the PJM region.

Conectiv Energy's solar project in Vineland, New Jersey became operational with two megawatts energized in September and the remaining two megawatts energized in December. This project supports our initiative to increase our renewable energy portfolio. Tony will review Conectiv Energy's financial results, but I want to make a few comments on Conectiv Energy's performance.

The economic recession and mild weather have clearly lowered demand and dampened volatility. Decreased demand, combined with low fuel prices have displaced coal generation and compressed margins. Our 2009 coal fleet, capacity factor was approximately 21% compared to 56% in 2008 and generation energy margins were down 57% as compared to 2008.

While Conectiv Energy was certainly challenged in 2009, the key value drivers for the business remain in place. Great assets in an advantageous location in PJM. As Tony will address shortly, we expect a higher contribution from Conectiv Energy in 2010 due to higher capacity prices and improved forward energy margins and hedging execution.

In December, we announced our plans to exit Pepco Energy Services retail energy supply business through an orderly wind down. This time last year, we faced significant collateral requirements for this business. Beginning in late March, we were able to reduce the collateral exposure of the business by entering into a credit intermediation agreement. Among the factors considered when conducting our strategic review of the retail energy supply business was the return earned when investing capital in this business as compared to alternative investments.

Pepco Energy Services will continue to fulfill its obligation under its existing contracts. We expect the business to remain profitable through 2012, based on an existing contract backlog and its hedged position with minimal losses beyond that date through 2014, the expected completion date of the wind down.

Pepco Energy Services also provides energy savings performance contracting services, principally to government and institutional customers. This business will not be affected by the wind down of the retail energy supply business. Since 1995, Pepco Energy Services has evolved to become one of the leading providers of energy savings and sustainable energy products and services. We believe the current political and social climates provide growth opportunities for this business given the focus on energy efficiency and renewables.

Before I turn it over to Tony, I want to address the impact of the recent storms that hit our service territories.

Earlier this month, we were hit by two severe winter storms within days of each other that resulted in extreme weather conditions including heavy snowfall, ice and high winds. We currently estimate the cost of system restoration will range between $30 million and $35 million with one half to two thirds being expense and the balance being charged to capital. We will pursue recovery of these costs through rate cases.

Storm damage is expected as part of the utility business and these restoration costs will be included in our first quarter operating results. To put this level of expense in perspective, the cost of restoration for the previous three largest storms over the past five years averaged less than $6 million. The cost of restoration due to the recent storms is clearly above what we have historically experienced and therefore, we view this level of expense as significantly higher than what would be expected in a typical year.

At this point, let me turn it over to Tony Kamerick.

Tony Kamerick

Good morning, everyone and thank you for joining us today. I will recap our consolidated earnings and then address our performance by operating segment. We'll then open the call to your questions.

Consolidated earnings in 2009 were $235 million or $1.06 a share compared to $300 million or $1.47 per share in 2008. Excluding the special items that Joe referred to, earnings would have been $200 million or $0.91 per share in 2009 compared to $393 million or $1.93 per share in 2008.

Dilution, primarily from our November stock offering, negatively affected earnings per share by about $0.09. Lower benefits from income tax adjustments as compared to 2008 reduced earnings by $0.08 per share. These items impact all of the lines of business.

Consolidated earnings for the fourth quarter were $41 million or $0.18 per share compared to $67 million or $0.32 per share for the fourth quarter of last year. There were no special items in either period.

For the Power Delivery operating segment, earnings in 2009 were $0.90 per share compared to $1.23 per share in 2008. Excluding special items in 2009, earnings would have been $0.75 per share. The biggest driver of the year-over-year decrease was higher O&M expenses which lowered earnings by $0.15 per share.

Early last year, we set a target of $757 million for 2009 Power Delivery operation and maintenance expenses. For the year, Power Delivery O&M came in at $752 million. We are pleased with the management of O&M expenses during the year, especially given the increase in pension and other post-retirement benefit expenses as compared to 2008.

For 2010, we estimate the pension and other post-retirement benefit expense to be approximately $116 million across PHI as compared to $149 million in 2009. Historically, about 70% of this expense is reflected in our operating expenses with the balance charged to capital.

Additionally, although we project there will be no minimum funding requirement in 2010 under the Pension Protection Act, in accordance with our policy, we currently plan to make a discretionary tax deductible contribution in 2010 of approximately $100 million to bring the plan assets to at least the full funding level under the Pension Protection Act. The utilities subsidiaries' obligation for funding the plan is expected to be approximately 80% of this contribution. We made a $300 million contribution to the pension in 2009.

Also contributing to the decrease in Power Delivery earnings year-over-year, were higher capital costs of $0.08 per share, which were incurred in 2009 principally to support growth in rate base not yet fully reflected in regulated rates. Higher depreciation expense lowered earnings by about $0.04 per share due to higher plant and service balances.

For the fourth quarter, Power Delivery earnings were $0.14 per share compared to $0.24 per share for the 2008 period. The biggest factor that lead to a decrease in earnings quarter-over-quarter was higher operation and maintenance expense.

As Joe discussed, Conectiv Energy managed through a challenging year. Earnings were down significantly, especially as compared to the very strong results in 2008. Conectiv Energy's 2009 earnings were $0.07 per share compared to $0.60 per share in 2008.

Mild weather and weak economic conditions reduced the demand for power in eastern PJM with load in this region down 3.5% year-over-year. Lower energy commodity prices and narrow generation spreads also pressured margins throughout the year. The primary drivers for the earning decrease were lower generation output and reduced spark spreads and dark spreads.

Conectiv Energy's own degeneration output was down 27% for the year and the average spark spreads and dark spreads for our generation fleet declined 57%. These factors decreased earnings by about $0.39 per share versus the prior year.

Also contributing to the earnings decline in 2009 was the performance of economic fuel hedges that were favorable due to rising fuel prices in the first half of the 2008 and unfavorable due to falling fuel prices throughout 2009. Key factors that drove the hedge performance were lower than expected load service volumes and generation output. The impact of the economic fuel hedges was an earnings decrease of about $0.31 per share.

A favorable factor that increased earnings by about $0.19 per share was higher capacity margins due to higher RPM clearing prices in the eastern part of PJM. Looking ahead, we are confirming the forecasted gross margin ranges of $340 million to $410 million for 2010 and $380 million to $480 million for 2011. These ranges incorporate the current forward energy market prices and volatilities and include expected capacity margins of $225 million in 2010 and $195 million in 2011. As well as the impact of the delta generating plant becoming operational in 2011.

For the fourth quarter, Conectiv Energy's earnings were $0.02 per share, which were flat when compared to the earnings in the 2008 period. Pepco Energy Services 2009 earnings were $0.18 per share compared to $0.19 per share in 2008. Retail energy supply gross margin increased year-over-year due to lower electric and gas supply costs, lower capacity charges and the higher capacity revenues. These increases were more than offset by higher capital costs associated with the credit and collateral facilities, as well as dilution.

For the fourth quarter, Pepco Energy Services earnings were $0.03 per share, compared to $0.05 per share in 2008. The earnings decrease was driven by higher capital costs. Now let me turn it back to Joe Rigby for some closing remarks

Joe Rigby

Thanks, Tony. While 2009 was a difficult year from an earnings perspective. I want to convey that we fully expect earnings improvement in 2010. As Tony just commented, we expect higher gross margins from Conectiv Energy and we expect constructive regulatory outcomes in our pending distribution rate cases. As we have previously indicated, we will provide 2010 earnings guidance at our Annual Analyst Conference scheduled for April 12 and 13 here in Washington, DC.

At the conference, the executive team will discuss our strategic plans and provide a detailed review of our business and I hope the analysts on the call will be able to join us. And with that, we would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Paul Patterson of Glenrock Associates. Please proceed.

Paul Patterson – Glenrock Associates

Good morning. Can you hear me?

Tony Kamerick

Yes, Paul. We can hear you.

Joe Rigby

Good morning.

Paul Patterson – Glenrock Associates

I wanted to ask you about the pension expense. You mentioned that I guess 70% of the pension expense is going to be – go to operating, I believe? Is that correct?

Tony Kamerick

That's a rule of thumb, yes.

Paul Patterson – Glenrock Associates

Okay. And on the other hand, you're contributing some money as well. Would that offset some of it? So are we thinking about $23 million decrease in pension expense in 2010 versus '11?

Tony Kamerick

The pension contribution is incorporated within the estimate of the expense.

Paul Patterson – Glenrock Associates

Okay.

Tony Kamerick

If that's the question you're asking.

Paul Patterson – Glenrock Associates

So roughly speaking – obviously, this rule of thumb $23 million out of the $33 million we should expect sort of a pretax decrease from pension alone? Is that correct?

Tony Kamerick

I think, yeah. That's correct.

Paul Patterson – Glenrock Associates

Okay. And then with respect to the decoupling, the staff – the extra witness that was used in the staff testimony in Delaware was a little aggressive it seemed to me, perhaps than others with respect to the decrease in ROE relative to decoupling if I read the testimony accurately. Is there – if it looks like that's what the commission is going to be going for, is there any – how does one think about the purpose of going in. I guess for decoupling, if the ROE is so much lower? I mean how should we think about that in terms of that regulatory process if you follow me?

Tony Kamerick

Are you suggesting that if the commission decides to go with that particular witness' recommendation, is there some opportunity for us to pull back on our requests?

Paul Patterson – Glenrock Associates

Yeah.

Tony Kamerick

Yeah. No. I don't think there is, no. I mean we would – obviously, we have rebuttal testimony that we're going to file shortly. That witness' recommendation we do believe is quite extreme. We think we can prove that and if the commission did go with her recommendation. We would appeal it, obviously also.

Joe Rigby

Paul, this is Joe. I think just to kind of recall the comment I made about an acceptance of decoupling in concept. So we'll see how this plays out but as Tony said, we will come back with our commentary through rebuttal.

Paul Patterson – Glenrock Associates

Okay. Great. And then in terms of the weather adjusted retail sales and I know you are decoupling and what have you and mitigating some of this I would assume. But in general, what are you seeing economically? I think of your area as being perhaps more resilient economically to the economic downturn due to government growth and your service territory. What is your thought process about the economy in your area and what you're seeing going on there going forward and what have you?

Joe Rigby

Paul, this is Joe. I'll make a couple comments and if Tony wants to add on. I think it has held true that there's been a kind of lessening of an impact on a relative level. I think we continue to enjoy the influence of the federal government as well as the location within the I-95 corridor. When we think on a go-forward basis either on sales or on growth in customers, we would expect over the planning horizon about a 1% growth year-over-year.

Paul Patterson – Glenrock Associates

Okay. Great. And then just finally on the tax rate. If I got – ballpark is around 35% for 2010 on a normalized basis. Is that what we should be thinking about in – just what's your forecast I guess for a tax rate we should be thinking about going forward?

Tony Kamerick

Well, I mean we always say incrementally it is 35%, but you really have to take a look at the table that we provide in the K that shows the difference – the differences between the incremental tax rate and the effective tax rate. And you have to estimate something for those items.

Paul Patterson – Glenrock Associates

Okay. I appreciate it, guys. Thanks a lot.

Joe Rigby

Thanks, Paul.

Operator

Our next question comes from the line of Reza Hatefi of Decade Capital. Please proceed.

Reza Hatefi – Decade Capital

Thank you very much. Could you give us some more color, update on the tax – the IRS tax issue? And when potentially that will get resolved?

Joe Rigby

Are you talking about the across border lease issue?

Reza Hatefi – Decade Capital

Yeah.

Joe Rigby

Okay. Yes. This is – I'll ask Kevin McGowan, our Treasurer to comment on that.

Kevin McGowan

The lease issue is in a 2001, 2002 audit cycle that's the first one. We are moving closer to resolving the non – lease issues in that audit cycle and hope to receive a 90 day deficiency letter in the next couple of months. Our expectations is that we'll pay the tax related to that audit cycle probably the first half of this year and file for suit later this year. And we expect it will probably take 18 to 24 months from the date we file suit to reach a court decision.

Reza Hatefi – Decade Capital

Okay. Any chance of a settlement or with that issue?

Kevin McGowan

There's always the possibility, but it doesn't look very likely at this point.

Reza Hatefi – Decade Capital

And a follow-up on the prior question, the pension. I guess here, you're going to see an improvement in pension expense in 2010 versus 2009. Does that $23 million get captured in your rate cases i.e., you see that benefit in lower pension expense. But on the other hand, it will lower your revenue requirement in the rate cases?

Tony Kamerick

Yes. That's certainly a possibility. It depends on how the commissions treat the pensions. Some of them are looking at averaging it. Some will use our test year. So it just varies by commission.

Reza Hatefi – Decade Capital

And then I guess could you give us some color on Conectiv and what your strategy is with this segment going forward? I guess there's obviously – there's been some speculation in the market about potential sale of this unit. Could you just talk about your thoughts?

Joe Rigby

This is Joe. Well, first we don't comment about rumors out in the press. But I've said, several times in the past that we routinely look at our business mix. And we'll continue to do so. I've also been very consistent in the sense that our core focus remains on the regulated T&D business. Conectiv Energy has been in the mix – in our business mix obviously, since the merger and they've had good years and not so good years like the past one. But as I mentioned in my comments, we see this as a great set of assets and it's in an advantageous location. So our view of routinely looking at the mix has not changed.

Reza Hatefi – Decade Capital

And I guess lastly on Conectiv. It seems like in 2009, the energy related – energy plus capacity fuel and power hedges and load service, the non-capacity margins were actually I guess negative $10 or $15 million. And I guess coming into the year, you were – it seemed like you were pretty well hedged going back to your Analyst Day last March. What's – I guess how much of the '09 sort of underperformance can be attributed to weather and things of that nature versus 2010 and the guidance you've given for 2010 for Conectiv?

Gary Morsches

Okay. This is Gary Morsches. Yes, as Joe mentioned, our units ran considerably less in 2009 and 2008 in that average gross margin – unit margin that we received was down 57%. That certainly negatively impacted our business. But I do want to bring up one point, when you look at that PJM capacity margin for generation activities that does not include all the net hedges we have against capacity. When we serve load, we have to designate some of that capacity against those load obligations. And those negative hedges are not in that number.

So it kind of flows through and makes our physical energy and ancillary services numbers – energies numbers look a lot worse than they actually are. In 2010, we reiterated or confirmed the range that we previously stated and have taken a stance on hedging against sparks spread going forward around our generation fleet. And those hedges are in a much more advantageous state for both 2010, 2011 than we were in 2009.

Reza Hatefi – Decade Capital

Okay. Okay. Thank you very much.

Operator

Our next question comes from the line of Dan Eggers of Credit Suisse. Please proceed.

Dan Eggers – Credit Suisse

Good morning. Could we just follow-up a little bit more on that hedging question and may be just help explain? So we understand a little better how the hedges for '10 and '11 are better than the hedges for '09 just because there's a pretty good step up in your guidance right now?

Gary Morsches

Right. Dan, this is Gary again. Yeah, again we're in – I would say a better hedge position in 2010 and 2011. And we reflected that in kind of the – it's in our range and how much of that range or how much of the midpoint of that range that we have hedged. For example, in 2010 we have talked in the past that we've got about $225 million of capacity value coming in. We also have about $15 million of energy value that is hedged through capturing positive sparks spreads in 2010 and contracted ancillary revenues.

And on top of that too, we do have our normal of course, some amortized margins from our marketing efforts. That is very consistent with 2011. And actually in 2011 our energy value is hedged at a positive $45 million. So our team's goal is to capture as much value as possible through active risk management to hedge reasonable value and minimize our earnings variability. And those opportunities have been more available to themselves here over the past few months.

Dan Eggers – Credit Suisse

So if I look at the 2010 guidance range of $340 to $410 to get to the low end. There's another $100 million of market, margins you guys expect to pick up to get to the $340. And presumably, if I take it to the midpoint here's $150 million of energy margin out there?

Gary Morsches

I'm not sure about your math there. But I mean, we've got...

Dan Eggers – Credit Suisse

If I just take $340 to $410 and I back out $225 plus $15, it would be $240, right?

Gary Morsches

Right. That's right.

Dan Eggers – Credit Suisse

So that means there's like $100 million of energy margin?

Gary Morsches

Well, we've got some marketing and origination margin that's in there as well. And we've got $27 million of that that is actually real are going to be realized in 2010 from closed load auction transactions and other origination transactions. And then on top of that, we've got to make energy margins through our fleet and through other origination and marketing activities that we routinely do.

Dan Eggers – Credit Suisse

Okay. Got it. And Tony, can you talk a little more to the – or Joe – to the storm costs? So you guys will show an expense for half to two thirds of the $30 million in the first quarter. How does that get reversed later if you get regulatory relief? Will that get backed out in the future if the regulators give you relief or will it just be a future adjustment?

Tony Kamerick

Well, it could be, Dan. Again, it depends on how the Commissions treat the costs in the rate cases. But if, for example, they were to allow us to amortize the cost over three years then we would create a regulatory asset on the balance sheet and reverse the amounts that we've charged.

Dan Eggers – Credit Suisse

Will you go to them in a special docket or will these be part of future rate cases?

Tony Kamerick

Well, right now, we think that we can incorporate these costs into our pending cases. And as far as the Pepco or the DPL Maryland case and the Pepco DC case, we would have to address those in the next round which probably is not going to happen this year anyway.

Dan Eggers – Credit Suisse

Anyway to ballpark how much of it could get picked up this year versus would be for the next cycle? How much of the $30 million was not Maryland or DC?

Tony Kamerick

I don't have those ratios off the top of my head, Dan. I can give them to you.

Dan Eggers – Credit Suisse

Okay.

Joe Rigby

Dan. This is Joe. Like Tony said, we have an opportunity with the pending filings to at least get some reflection. I wouldn't look at it as being instantaneous. Obviously, in the year somewhat driven from the fact of one, how they would handle it. And then two, dependent upon the time frame that the case was resolved, you wouldn't get the full annualized effect. But in the areas where we had the most significant damage, we have really the opportunity to amend those pending filings. And we'll see what we can do.

Dan Eggers – Credit Suisse

Okay. Thank you, guys.

Joe Rigby

Sure.

Operator

Our next question comes from the line of Ali Agha with SunTrust Robinson. Please proceed.

Ali Agha – SunTrust Robinson

Thank you. Good morning.

Joe Rigby

Good morning.

Ali Agha – SunTrust Robinson

Joe or Tony, presuming that you get a relatively favorable treatment on the rate cases that are pending right now. Should we expect and of course, these storm costs moving on. But normally, should we expect the regulatory lag in your system to be largely eliminated or how should we think of that going forward?

Tony Kamerick

Well, that's a tough question. We're always trying to minimize the regulatory lag but I think there will – in reality, there will always be a little. I think we expect to file another round of cases if these rates are not adequate to cover the costs that we see coming forward. We do have a lot of the AMI expenses that are deferred. So there's virtually no regulatory lag in terms of earnings on those. But there will always be a little bit of regulatory lag.

Ali Agha – SunTrust Robinson

Okay. And also remind me in the Conectiv guidance going forward. Roughly on an annual basis, how much is – does the energy marketing contribute? Is it about 40 million a year?

Gary Morsches

Yes. This is Gary Morsches. Yes.

Ali Agha – SunTrust Robinson

About 40 million, okay. And my final question with regard to your financing plans for 2010. Could you provide an update? And should we still expect that you're looking at some kind of equity raise some time this year?

Tony Kamerick

We have not made any indication other than what we said last November that it was a possibility.

Ali Agha – SunTrust Robinson

Okay. So those numbers are still the numbers you're working with.

Tony Kamerick

Yes. I don't think there's anything that – new on that front.

Ali Agha – SunTrust Robinson

I see. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Jay Dobson of Wunderlich Securities. Please proceed.

Jay Dobson – Wunderlich Securities

Thanks. Most of my questions have been answered but I was hoping we could go back to the cross-border issue. Was there any delay there? I seem to recollect we were anticipating or you were anticipating a decision on appeal from the IRS in the first quarter here. And then that might trigger some decision about court action? Is my recollection incorrect there or just give me a little more detail?

Kevin McGowan

Yes. This is Kevin McGowan. I think what you are referring to is when the ConEd case came out last year; we were waiting for the order to actually be entered into the court that would start the 60-day appeals process clock to see if they were going to appeal it. That case has not been entered in yet. So that clock has not started.

Jay Dobson – Wunderlich Securities

Okay. No, I don't think that was what I was referring to. But can you then maybe just tell me exactly where things stand with your case at the IRS?

Tony Kamerick

He's talking about ours.

Kevin McGowan

Were you referring to our 90-day deficiency letter from the 2001 to 2002 audit?

Jay Dobson – Wunderlich Securities

Yes. I believe that's what it was. If you could tell me exactly – I'm looking at the totality of the issue. So if you can just give me an idea where that stands and what is going to trigger.

Kevin McGowan

Sure.

Jay Dobson – Wunderlich Securities

If there's not going to be a settlement – any court action.

Kevin McGowan

We are trying to resolve – what I referred to as the non-leasing issues in the 2001 and 2002 audit. Once those are resolved, then they will issue a 90-day deficiency letter. We had hoped that it would be first quarter this year but it's taking longer than we have expected. The ball is really in their court but we are moving closer. And we expect, hopefully, something first half of this year.

Jay Dobson – Wunderlich Securities

And then that would trigger or allow you to make a decision on how you move forward on it?

Kevin McGowan

That's correct.

Jay Dobson – Wunderlich Securities

Okay. Great. Thank you very much.

Operator

Our next question comes from the line of Maurice May of Power Insights. Please proceed.

Maurice May – Power Insights

Yes. If I could focus on the DC rate case because it's your largest rate base. Can you review how that case has been going? You filed initially for a $50 million rate increase. Can you give us an update on what staff and other intervida recommendations were? And perhaps some comments on how the hearings went?

Tony Kamerick

Maury. This is Tony. I don't have the other party recommendations right in front of me, Maury but we expect a decision in that case any day now.

Maurice May – Power Insights

Okay.

Tony Kamerick

I think Donna is digging up the chart that we had. We'll give it to you later, Maury.

Maurice May – Power Insights

Okay. Great. Tony. Thanks.

Operator

At this time, we have no further questions.

Joe Rigby

Okay. Thank you, Operator. This is Joe again. I just want to thank you all for joining us and for your interest in Pepco Holdings and we look forward to seeing many of you here in Washington in April. And with that, have a great day. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Pepco Holdings, Inc. Q4 2009 Earnings Call Transcript
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