Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pepco Holdings, Inc. (NYSE:POM)

Q4 2013 Earnings Conference Call

February 28, 2014 10:00 a.m. ET

Executives

Donna J. Kinzel - Chief Risk Officer, VP & Treasurer

Joseph M. Rigby – Chairman of the Board, President & CEO

Frederick J. Boyle – SVP & CFO

David M. Velazquez – EVP, Power Delivery

John U. Huffman – President & CEO, Pepco Energy Services

Analysts

Paul Patterson - Glenrock Associates LLC

Andrew Levi – Avon Capital Advisors

Dan Eggers – Credit Suisse

Ali Aka – SunTrust

Kit Konolige – BGC Partners

Charles J. Fishman – Morningstar Inc.

Craig Lucas – Nexus Asset Management

Jonathan Reader – Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Pepco Holdings Incorporated Earnings Conference Call. My name is Cresol, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to Ms. Donna Kinzel, Vice President and Treasurer. Please proceed.

Donna J. Kinzel

Thank you, Cresol, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings Fourth Quarter 2013 Earnings Conference Call. The primary speakers on today's call are Joe Rigby, Chairman, President and Chief Executive Officer; and Fred Boyle, Senior Vice President and Chief Financial Officer. Also available to answer your questions are Dave Velazquez, Executive Vice President, Power Delivery; and John Huffman, President and Chief Executive Officer of Pepco Energy Services.

On today's call, we will be referring to slides, which are available on the Investor Relations section of our website.

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 and found on Slide 2 of our presentation.

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

Joseph M. Rigby

Thanks, Donna, and good morning everyone and thanks for joining us today. As seen on Slide 3, 2013 GAAP earnings from continuing operations were $110 million compared to $218 million in 2012 excluding items that we feel are not representative of our ongoing business operations, 2013 earnings would have been $280 million compared to $225 million in the prior year, nearly a 25% increase.

By far the biggest driver of increase in adjusted earnings year-over-year was the higher electric distribution revenue resulting from higher rates driven by increased infrastructure investment. In 2013, we invested $1.3 billion of capital much of it aimed at improving the reliability of our electric system. While our earned return still lag or authorize returns, the investments we made are resulting in a more resilient electric system for our customers and higher earnings for our investors.

Later in the call, Fred will address the financial results in more detail, but first I'll address some topics of interest starting with our improvement in electric system reliability. As seen on Slide 4, we’re pleased with the progress we’ve made in improving the liability. Over the past three years, the decreases in duration and number of power outages have been significant, reflecting the sizeable investments we have made in the electric system. 2013, we exceeded the reliability standards in all of our jurisdictions with the exception of the Delmarva Power in Maryland which experienced severe storms that were not excluded from reliability statistics.

Since 2011, we’ve seen significant reliability improvements in all of our utilities especially in Pepco with a duration in number of outages have improved by 30% and 25% respectively. This improvement in reliability is translating into improved customer satisfaction. While the overall customer satisfaction has improved in all of our utilities since 2011, the greatest increase has been in Pepco where the customer satisfaction score has increased 12 percentage points.

Reliability and restoration performance remain important key metrics for customer satisfaction. As we continue our commitment to improving reliability and enhancing customer service, we plan to invest $5.8 billion in the power delivery business over the next five years as seen on slide 5. Given this level of investment it is critically important to ensure timely and reasonable cost recovery through constructive regulatory outcomes.

All base rate cases were concluded in 2013 resulting in total annual revenue increase of $75 million because the electric cases offshore of what is needed to earn our authorized rates of return, additional base rate case filings are necessary in these jurisdictions, the first of which was filed in December by Pepco Maryland.

Slide 6 thru 9 provides the details of the three pending electric distribution base rate cases. Pepco in Maryland and the District of Columbia and Delmarva Power’s in Delaware as well as the timing of our upcoming cases. In total, the free pending rate cases request an annual rate increase of $127 million based on requested returns on equity of 10.25%. Decisions are expected by the end of the first quarter in the Pepco DC case and an early April for the Delmarva Delaware case. Based on the seven months statute in the State of Maryland, a decision is expected in the Pepco rate case in early July of this year.

Our efforts to reduce regulatory lag will continue to include buying the electric distribution base rate cases annually in each of our jurisdictions. While we view this approach as inefficient and costly it is necessary given the level of planned divestment in the traditional rate setting frameworks in our jurisdictions that are based on historic investments in costs.

We will also continue engage the regulatory community and other stakeholders to discuss the changing regulatory paradigm and the need to pursue alternative rate making mechanisms in today’s environment of low, low growth and aging infrastructure. An example of such efforts is Delmarva Power’s forward-looking rate plan as summarized on slide 10. The adoption of this proposed multiyear plan will move the company towards a more efficient and performance base framework.

On October 22, the Delaware Commission opened a docket to review the plan and in the second quarter Delmarva Power intends to update and re-file the forward-looking rate plan upon completion of the pending electric distribution base rate case.

As seen on slide 11, we’re pleased that on February 4, the Council of the District of Columbia approved the $1 billion undergrounding legislation initially recommended by the District of Columbia’s power line undergrounding task force. The legislation is expected to become law early in the second quarter following the 30 day congressional review period thereafter Pepco will submit a financing plan and a construction plan including surcharge cost recovery to the Public Service Commission for its review and approval.

Approval is expected in the fourth quarter of 2014. The power line undergrounding initiative is a 7 to 10 year $1 billion program to underground up to 60 high voltage distribution feeder lines, which have historically been most impacted by storms and overhead related outages. Funding for this initiative will be split 50:50 between Pepco and the District of Columbia. Expenditures related to the project are currently not included in our five year construction plan.

The passage of this legislation represents collaborative effort by the District of Columbia government officials, Public Service Commission, the Office of People Council, Community Members and Pepco.

In New Jersey, the consolidated tax adjustment policy is greatly hindering our ability to achieve reasonable regulatory outcomes for Atlantic City Electric. While we’re disappointed that this matter has not yet been resolved, we continue to actively participate in the generic proceeding to address this policy and we to plan to file our next distribution base rate case in New Jersey in March.

As seen on slide 12, on December 18, the settlement agreement was filed with the Federal Energy Regulatory Commission regarding the recovery of the Mid-Atlantic power pathway or map of binding cost. The settlement provides for recovery of $81 million of cost over a three year period and allows Delmarva Power and Pepco to retain the title to all real property acquired for the project.

Now turning to sales in slide 13, while our customer count grew by half a percent in 2013, weather-normalized kilowatt hour sales decreased 1.5%. The decline was to due to lower usage by commercial customer across all of our jurisdiction, lower usage by Atlantic City Electric’s residential customers and lower usage by Delmarva Power’s industrial customers in Delaware. Drivers of the decrease in commercial sales include weak economic recoveries especially in Northern Delaware and Atlantic City where the gaming industry is facing increased regional competition.

Reductions in industrial sales were driven by weak economic conditions and a shutdown of a steel mill in Delaware. Keep in mind that with the decoupling in place in Maryland and the District of Columbia, approximately two-thirds of distribution revenue is decoupled from consumption.

As shown on slide 14, Pepco Energy Services signed $6 million in energy efficiency contracts during 2013, as compared to $9 million in 2012. The energy services market appears to be in the early stages of recovery. The underground transmission construction remains strong with significant bidding activity, many projects are in progress in a healthy pipeline of perspective projects.

During 2013, $111 million of contracts for underground construction were signed compared to $47 million in contracts in 2012. Market activity is being driven by utility infrastructure and reliability spending. PES expects to generate after tax earnings of between $6 million and $8 million in 2014.

And at this point, let me turn it over to Fred Boyle.

Frederick J. Boyle

Good morning and thank you for joining us. I’ll now recap our earnings, address our performance by operating segment and then open the call to your questions.

Slide 15 summarizes our earnings for the full year and fourth quarter of 2013. GAAP earnings from continuing operations for 2013 were $0.45 per share compared to $0.95 per share in the prior year. The 2013 period includes charges related to evaluation allowance on certain deferred tax assets, interest associated with the change in the assessment of corporate tax benefits related to the former cross-border energy lease investments and an impairment charges related to Pepco Energy Services long-lived assets.

Excluding these items our 2013 adjusted earnings from continuing operations were a $1.14 per share compared to the 2013 guidance range of a $1.08 to a $1.18 per share. Adjusted earnings from continuing operations in 2012 were $0.98 per share.

For the fourth quarter of 2013, GAAP earnings from continuing operations were $0.23 per share compared to $0.15 per share for the 2012 period. Excluding impairment charges in both periods related to PES’s long-lived assets, adjusted earnings from continuing operations for the three months ended December 31, 2013 were $0.24 per share compared to $0.17 per share for the same period in 2012.

Due to the early termination of Pepco Holdings’ cross-border energy lease investments during 2013, these investments are being accounted for as discontinued operations and are no longer reported as a separate operating segment for financial reporting purposes.

Also this year PES completed a previously announced wind-down of its retail energy supply component. As a result, the operations of PES' retail electric and natural gas supply businesses are being reported as discontinued operations and are no longer a part of the PES operating segment for financial reporting purposes. A summary of the drivers of our financial results for the quarter and year-to-date periods can be found on slide 16 and 17.

Power delivery earnings were $1.18 per share in 2013 compared to a $1.02 per share in 2012. Higher distribution revenue primarily due to higher rates driven by increased investment and utility infrastructure increased earnings by $0.28 per share and lower O&M expense increased earnings by $0.07 per share.

The higher earnings were partially offset by $0.08 dilution from additional shares of common stock outstanding and $0.05 of higher depreciation and amortization expense associated primarily with increased amortization of regulatory assets in higher plant investment partially offset by lower depreciation rates. Higher net interest expense and lower default electric supply margins due to a favorable adjustment in the prior year each lowered earnings by $0.03 per share.

For the fourth quarter Power Delivery earnings were $0.25 per share as compared to $0.18 per share in the 2012 quarter. Higher distribution revenue primarily due to higher rates related to increased investment utility infrastructure increased earnings by $0.06 per share and lower operation and maintenance expense increased earnings by $0.04 per share. Partially offsetting the increase in earnings per share quarter-over-quarter was $0.03 of higher depreciation expense.

Pepco Energy Services adjusted earnings per share were $0.02 for 2013 as compared to breakeven in the prior year. As adjusted PES earned $0.01 per share for the fourth quarter of 2013 as compared to a breakeven for the same period in 2012. The increase in earnings for both the year-end quarter was due to improved performance in the Energy Savings and Thermal businesses.

Incorporated another which consists an unallocated corporate costs, the remaining PCI investments not related to cross border energy leases, the adjusted net loss for 2013 was $0.06 per share as compared to $0.04 per share in the prior year.

Higher net interest expense for the increased and adjusted net loss 2013. The net loss for the three months ended December 31, 2013 was $0.02 per share as compared to a loss of $0.01 per share in 2012.

Now, I’ll turn to some topics of interest for 2014. As seen on Slide 18, we estimate the pension and other post retirement benefit expense to be approximately $40 million in 2014 as compared to $57 million in 2013. There was no pension contribution plan for 2014 as compared to $120 million contribution in 2013. The funded status of the planning year-end 2013 was 99%.

Turning to slides 19 and 20. Our 2014 earnings guidance range for continuing operations is $1.12 to $1.27 per share. A guidance rang assumes normal weather conditions and excludes the results of this continues operations and the impact of any special, unusual or extraordinary items, the effects of adopting any new accounting standards or changes in tax law in the impairment of assets.

Looking at our guidance range for 2014 as compared to our adjusted results for 2013 significant drivers that are excepted to have a positive impact on earnings include the annualized impact of 2013 rate case outcomes, constructive outcomes for current round of base rate cases and higher transmission revenue. Factors expected to have a negative impact on earnings in 2014 as compared to 2013 include higher power delivery depreciation and amortization expense, increased operation and maintenance expense and greater average common shares outstanding. Also keep in mind that in 2013 we benefited from $0.03 per share of income tax adjustments.

Now let me turn it back to Joe Rigby for some closing remarks.

Joseph M. Rigby

Thanks Fred. I’m pleased with our overall progress in 2013, we’re a regulated utility company with a robust rate base growth plan. Our reliability efforts are providing sustainable results and customer satisfaction is improving. We continue to believe our regulatory challenges can be overcome and reducing regulatory lag remains a top priority. We remain committed to the dividend and believe our earnings growth opportunities provide a foundation for enhancing shareholder value and with that we like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Paul Patterson from Glenrock Associates, please proceed, sir.

Paul Patterson - Glenrock Associates LLC

Good morning.

Joseph M. Rigby

Good morning, Paul.

Paul Patterson - Glenrock Associates LLC

Just going over slide 20 for a second, when I add up these pluses and minus by dollar 6, and I see that in the sort of the sacred box and that’s exactly where it is, but the pattern going through slide 12 to slide 27, it includes impact of regulatory outcomes, so should we think of that as being, I mean, like to sort of think $0.06 to $0.21 of regulatory outcomes for 2014 which is sort of expecting in the numbers?

Frederick J. Boyle

This is Fred. As far as the range going from the $6 to $27, regulatory outcomes are one component also included in the range, allows for variability and sales for example, O&M other type of operating expenses that are normally embedded in the range that certainly rate case outcomes is a large element in the range.

Paul Patterson - Glenrock Associates LLC

Okay. So, when we’re thinking about that range, how much should we think about it being sort of the regulatory outcome number if you follow me?

Frederick J. Boyle

I do follow you, and we don’t specifically identify what amount in the range is the regulatory outcomes, but it is a component of the range.

Paul Patterson - Glenrock Associates LLC

Okay. And then, when we were talking about guidance and you mentioned the CTA in New Jersey what do you have for that, how does that figure into guidance I guess? The outcome of CTA I mean, are you expecting, what are you sort of expecting there, I guess?

Frederick J. Boyle

Well, as far as it relating to arrange that’s just one of the elements as part of the regulatory outcomes that we had mentioned, but specific to the CTA as we have said we had anticipated something maybe up by the end of 2013 and/or else early ’14 and obviously we haven’t seen anything yet but we have found disappointing. But, our expectation is as that we will see something here in the first quarter or second quarter of 2014 as it relates to the CTA and we planned to move ahead with filing our rate case during March of this year.

Paul Patterson - Glenrock Associates LLC

And then, the footnote that you have here for the $0.04 amortization associated with the depreciation credit, how does that actually figure in there is that for 2014 versus 2013 is that I wasn’t completely clear, could you just elaborate a little bit on that.

Frederick J. Boyle

Sure. What that relates to is there was a credit that was reflected in depreciation expense and then therefore in rates that expired and during 2013 therefore and ’14 versus ’13 that amortization has gone, so the expense goes up that’s what driving the expense up and there’s an offset then to that expense that’s embedded in the revenues, it’s in the other net income in the bar chart.

Paul Patterson - Glenrock Associates LLC

Okay. That’s helpful and then with sales growth, just what are we expecting now in 2014 given kind of the negative approach that’s been happening for last couple of years and so actually what’s your latest outlook for that?

Frederick J. Boyle

We will provide more detail of that at the Analyst Day, but at a high level, we are looking at a slight decrease somewhere between almost flat, but very slightly down 0.2% somewhere in that range with a little bit favorable adjustment and Pepco and slightly unfavorable in DPLNAs.

Paul Patterson - Glenrock Associates LLC

Okay, and then finally, sorry to a take a lot, but just the rate case re-filings and stuff that we’re seeing here coming up, is there anything like potentially change that, I mean it does seems that you sort of coming right back in and I am wondering if there’s any potential for tracking or something, any discussions you have with the commissions with respect to perhaps making us little, but I don’t know I’m just wondering if there’s any variability around that?

Frederick J. Boyle

Well, as far as the upcoming filings, I’d say, I don’t see variability around that certainly as far as tracking and other types of mechanisms that something we’re in regular discussion with regulators and other stakeholders on that. But, nothing like that is in place right now, so given the level of spend we have, the intent is to continue with the rate case filings.

Joseph M. Rigby

Paul, this is Joe, just wanted to maybe offer some additional commentary. I think that it’s pretty clear in our prepared remarks we talked about this current framework and that it could be much more efficient and kind of the forces at play, you got lower sales, you got high interest structure spend. We’re constantly in discussion with the stakeholders with regard to what it is we’re trying to accomplish which at the end of the day is continued significant improvement in our reliability which we’ve clearly demonstrated, it’s working.

When I think about the progress we made on the undergrounding, and that there is a tracker that comes with that with albeit on a smaller lever in Maryland with complete resiliency charge, with the multiyear rate filing that we talk about in Delaware, hopefully you can see that, we’re making some headway and hopefully if we could get a multiyear plan in Delaware, you could have significant headway. So, we recognized the kind of the reputation we have underway here, but it’s certainly grew, we’re trying to see if we can broaden which is already now in place on some trackers.

Paul Patterson - Glenrock Associates LLC

Thanks a lot, Joe, I appreciate it.

Operator

Your next question will come from the line of Andrew Levi from Avon Capital Advisors, please proceed.

Andrew Levi – Avon Capital Advisors

Hi, good morning, happy Friday. And more importantly happy end of earnings season. You only have to do only these.

Joseph M. Rigby

My heart is shrinking Andy.

Andrew Levi – Avon Capital Advisors

Just a couple of questions. Just on the tax rate, what tax rate should we assume for 2014 on a corporate level?

Frederick J. Boyle

At the corporate level using a weighted of about 38% to 40% something in that range.

Andrew Levi – Avon Capital Advisors

Got it. In the guidance how much is parent drag?

Frederick J. Boyle

When you say parent drag, I’m not –

Andrew Levi – Avon Capital Advisors

Is there, so I mean, you had your energy services, you have your utility earnings, so I’m wondering if there is any or maybe there is a plus for parent to $12 to $27?

Frederick J. Boyle

Right, I would say there is not, there really isn’t any change in one segment we show a corporate in another that was a negative $0.06 includes where you had debt at the parent company level beyond going.

Andrew Levi – Avon Capital Advisors

Okay. So that about $0.06. Okay. And then, kind of looking at the guidance relative to potential rate relief, I just want to make sure understand this is right, if you kind of look at your stair steps you have like $0.14 positives, $0.22 of negatives, so just to get back to $1.14 it looks like there needs to be $0.08 of rate relief for other stuff. On top of that I assume it’s rate relief and just to understand the amount release we are at. I think first I guess you would agree with that, right?

Frederick J. Boyle

Yes, certainly as we mentioned earlier the rate relief is the largest element I would say in the range.

Andrew Levi – Avon Capital Advisors

All right and then if I’m not mistaken from your slides you have three pending cases right now that totaled about $127 million and then of that $127 million I just want to make sure I saw it on the slide for Delaware that $28 million of the $127 million you are asking is in rates subject to refunds, is that correct in Delaware?

Frederick J. Boyle

Yes that’s correct.

Andrew Levi – Avon Capital Advisors

Okay so at least like an net number of 99 that would be kind in your upside or in your range for rate relief upside downside whatever it is, that’s $99 million to get to the high individual range with this $0.08 that we just kind of talked about, I guess you need to get what about 85% to 90% of what you are asking for is that a good way to look at it?

Frederick J. Boyle

What you see on the slide of 2013 annualized rate case, it doesn’t include the Delaware because that hasn’t been decided yet.

Andrew Levi – Avon Capital Advisors

Right. But what I’m saying is Delaware is already, when Delaware be in this guidance because you’re collecting it already?

Frederick J. Boyle

It would be part of the range there because we haven’t had a decision yet.

Andrew Levi – Avon Capital Advisors

Right, right.

Frederick J. Boyle

So I’m saying Andy as it’s part of the range, if you look at the end of the bridge going from ’13 to ’14 where we show the annualized rate increase impact of $0.09 there’s nothing in there for Delaware.

Andrew Levi – Avon Capital Advisors

Okay and so just to get back to with the high-end of the range assumes what percent of total rate relief about?

Frederick J. Boyle

Now, that’s as far as any rate relief and assumptions around that that’s just part of the range as you know we don’t get into to specifically identifying how much is in we’ve assumed in there.

Andrew Levi – Avon Capital Advisors

Okay, because I thought last year you had said, maybe I’m wrong, it’s been a year and you had assumed close to 100% in your dollar 20 number. But I don’t know if that’s, I haven’t, you know, I have the transcript in front of me, but I’m just doing that from memory. Okay. So, in 2013 what percent of your ask did you end up getting?

Frederick J. Boyle

As far as the, I’d have to confirm that, I think it was somewhere in the 40 some percent, but I’d have to get that number for you, I don’t have that right here.

Andrew Levi – Avon Capital Advisors

Okay, thank you. Share count for 2014, what should we be using?

Frederick J. Boyle

It’s approximately 250 million shares.

Andrew Levi – Avon Capital Advisors

50, and just back on the CTA, what Paul was asking about, just as I read sale side notes, it seems kind of a misperceptions, in my eyes, on the CTA. So, if the CTA was settled tomorrow and it was no change to your rate base, there’s no immediate upside to the CTA, it’s really more when you file a rate case, it can’t be used against you to hurt negotiation, is that kind of the way to look at it?

Frederick J. Boyle

Yes, I think that is the way to look at it.

Andrew Levi – Avon Capital Advisors

Okay, good. And just on the CTA, any idea because first eventually kind of have a view of when we may get back to a more robust process, any idea when the process will start moving along again?

Frederick J. Boyle

We don’t have any kind of insight knowledge on that, as I indicated earlier and Joe had mention that, you know, the expectation was we have something, but it did seem to slow down then in January and Yes, we’re still in dialogue with various parties at the state not the commission, and the expectation is it’s going to be addressed here this year, hopefully the first half of this year.

Andrew Levi – Avon Capital Advisors

Yes, I think first half you said the same thing. And when you come to the conference next week, will we get a rate-based slide from you? When you come to the Morgan Stanley and I see you’re going to UBS too?

Frederick J. Boyle

We have the updated slide that we normally have in our investor relations deck.

Andrew Levi – Avon Capital Advisors

Okay and I don’t know what you’re going to do this year, but last year’s rate base, that didn’t have any change in that’s like for New Jersey has the full amount of rate bases, no CTA adjustment in that rate base number, right? Just to understand.

Frederick J. Boyle

That’s correct, Yes, the right base we show assumes no CTA adjustment.

Andrew Levi – Avon Capital Advisors

Okay, great. And make sure you guys get up here early Sunday, because it’s supposed to snow a lot.

Frederick J. Boyle

I changed my flight already because of that.

Andrew Levi – Avon Capital Advisors

All right, take the train, that’s my advice, but thank you very much.

Operator

Our next question will come from the line of Dan Eggers from Credits Suisse, please proceed, sir.

Dan Eggers – Credit Suisse

Hi, good morning, guys. Just on the kind of the rate case filings and you know, the states were there on, you know, forward mechanisms in place, how do you guys, you plan to maybe try and address these cases differently, or other things you’re going to try and include and focus on with these cases in Maryland and New Jersey that might help accelerate the transition in more fair and timely regulatory reason?

Frederick J. Boyle

Well, as far as the, you know, getting more fair and timely, I think, in Maryland in particular, when we’re looking for example at the current Pepco Maryland case, we met the reliability standards now two years in a row, so we firmly believe we should no longer be getting penalized at all from an ROE perspective. We continue to seek to get forward-looking reliability additions reflect it in rates and there’s a lot of dialogue that occurs around that. But borrowing some specific change in the treatment, how the rates are set there, we plan to continue the cycle of regular filings, we’d certainly like to get away from that as Joe has indicated. We did have a grid resiliency charge which is effective now this year, granted it’s not the size in involving the number of assets and investments, kind of resiliency that we had sought, but it is a recognition of the need for change and some of that incremental spend.

Joseph M. Rigby

Dan, this is Joe. We, I think appropriately also had the opportunity to talk to the key stake holders about kind of what’s up with us and the investment that we see is necessary and you know, we get it, I mean it’s obviously, it’s a concern that we have, and as I said in my prepared remarks, it’s a top priority for us. I do think that the whole issue of improving our performance in some ways maybe eliminating an argument, others could make as to why we should be “penalized” or dealt with, not as, maybe as constructive as we want it to be, I think we’ve effectively eliminated that argument, you know the multi-year, media and exceeding standards in the state of Maryland for Pepco, the improvement that we see in the district of Columbia I think puts us in a better state to hopefully get a more reasonable outcome. I would tell you that, you know, part of the reason why we chose to appeal the Pepco Maryland order from last summer was to push back and to present an argument that we can’t agree with somebody’s outcome.

So, we are, you should know that we’re taking every opportunity to place what we think is a reasonable approach and one that’s much more efficient. And I kind of hard come back to what we’re trying to do in Delaware, that if we can kind of get that process going, I think it could be something for us to point to in other jurisdictions that’s much more productive.

Dan Eggers – Credit Suisse

Joe, when you look at kind of the O&M trans and you guys done awfully your job managing cost, can you explain where the savings are coming from and how that isn’t getting in the way of kind of all the reliability work you focused on last couple of years?

Joseph M. Rigby

Yes, I’m going to make a comment to that, Dan, because I did note that you kind of pointed to that in your report and maybe as Dave Velazquez. I want to be really clear, we’re not managing O&M at any detriment to reliability. We are not going to go back to that place where, you know, that we’ve just, you know, we just removed ourselves. There’s a lot of other things that we can do, whether it’s maintaining a hiring freeze, just managing our outside legal cost, there’s a lot of things that we could do to drive even efficiencies in supply chain, that do not, in any way, impact the spending that we’re having. So I want you to, I want you and anybody else listening here on this call to know that. With that, let me turn it to Dave and he can maybe give you a little bit of color.

David M. Velazquez

Dan, a little bit of color on that, if you think about what we did in ’13, had changed, removed down the own and expend. The biggest driver was, there was less storm, major storm respiration crossing. And that was not just due to the fact that you say in ’13 we had less major storms, but all the work we’ve been doing on the system, also means when the storm came through in ’13, you know, we had less damage to put back up. As Joe had mentioned, there was some, offset maintenance cost associate with the hiring freeze and number of other things we’ve done in the business, and then also there was some lower customer service cross.

And again, some of that’s driven by the fact that we have less outages, less need to have customer service reps on the phone, also have been managing like all the business in that area, a mix of resources internal and external, and that kind of helps keep the cost down.

Dan Eggers – Credit Suisse

Hey Dave, kind of on the cost inflation then, what do you guys think the underlying rate of inflation is going to be over the next year, 1, 2, 3 years as you manage reliability and think about any of the other tools you have available to maybe offset some of that?

David M. Velazquez

I think if you looked at page 20 and you saw the increase year-over-year, the big drivers there first, we are in the process of replacing our two legacy customer information systems and there’s a big bump in that O&M related to that as we get prepared to do that and go live next year, some of the maintenance cost have gone up including some additional expense around tree trimming and some of the other things we’re doing and then just the general savory in contract escalation is varied in there in that $0.05. So that’s kind of where we expect ’14 to be as we look forward further in the future and kind of hard to predict but I don’t think there is anything else, any other large items that I know that’ll be a major factor driving our O&M up.

Dan Eggers – Credit Suisse

It means like a couple of percent years up kind of a that 2% type of numbers that is the baseline and we can manage against the goal?

Frederick J. Boyle

Dan, it’s a 2% to 3% range, yes.

Dan Eggers – Credit Suisse

And Joe, I guess formal imaginations on the eventual retirement, can you just maybe share the file process of the board and the process for evaluating all the candidates for the CEO role and you maybe have a view on when that timing is going to come out as they have gotten into process little bit?

Joseph M. Rigby

Sure. As we put out in the press release the board has got a very strong process in place, they’re going to look at both internal, external candidates. Expect that still targeting sometime around the end of the third quarter that we would make an announcement and then they were thoughtful and we had a great conversation around what we thought was an appropriate transition in overlap.

So, I feel very confident that the board is going to deliver what I’m sure all of us hope will be even a much better CEO next time. So, it’s, you know, I’m very confident in terms of where the company is and where it is going. So, it’s I think all that is really, really positive.

Dan Eggers – Credit Suisse

Okay, very good thank you guys.

Operator

Our next question will come from the line of Ali Aka from SunTrust please proceed.

Ali Aka – SunTrust

Thank you, good morning.

Joseph M. Rigby

Good morning.

Ali Aka – SunTrust

Couple of questions. Fred can you, the extreme weather that we’ve seen so far year-to-date, can you put that into context of your guidance as it move the needle one way or another, is it more O&M, is it higher volumes, is that much impact from the weather so far?

Frederick J. Boyle

So far this year I would say, the weather from a sales volume certainly there has been some favorable there, but as far as the guidance range, nothing is going to impact out of move that range.

Ali Aka – SunTrust

Okay. And then, in terms of your strategy on rate cases, obviously the annual filings comes out loud and clear, previously you had talked about revisiting CapEx, looks like that’s off the table now, can you confirm that and is there any sense or concern about rate case fatigue through this annual process that may actually be negative for you as you’re going down this road?

Frederick J. Boyle

We’re not trying to kind of signal any kind of cut and spending that’s not where we’re right now. And I think all the progress made is, it’s important for us to remain on track. We understand that the pressure that puts on things from a like point of view, I don’t, from a fatigue, I think all I can say to you is that, I remember the commission in Maryland saying that keep coming back in.

So, we understand that it’s our job to make these investments and get reasonable return and if it requires that we’re in frequently like we are, we have talked about this in the past, we’ve built up the capacity to be able to do that and I think part of that discussion always has to include that there are other more efficient ways of doing this. But, in the meantime, we’re going to stick to plan.

Ali Aka – SunTrust

Okay. Your rate base numbers as you laid out to us so far, I mean, 13 thru 18, or a 7% cager for rate base, you look at your plans right now, look at your runnings power lag, equity needs, I mean is it fair to say that EPS growth should equate to that between lag improvement and maybe some capital needs, is that a fair way for investors to be thinking about you guys going forward?

Frederick J. Boyle

As far as the forward look, as you look we don’t go out beyond the current year, but that’s why I provide the information as it relates to rate base and the growth and certainly the investment of making infrastructure is the core driver of growth in the future.

Ali Aka – SunTrust

But could you, I mean, number of your peer companies talk about at 8% to10% total return position for investors between dividend yield and EPS growth, I mean, presumably you can do that or better, but is that something you guys have thought about it on the presenting your investment case, benchmarking yourselves against what your peers are saying to us?

Joseph M. Rigby

Ali, this is Joe. We’ve thought about it, but we do not tend to do that in the present and by giving you our rate base growth along with our – as far out as we can provide our plan to file rate cases, we want to hopefully that’s helpful, but we’re not going to step into that place right at this time.

Ali Aka – SunTrust

Okay. And finally, Joe, as you look at your plan and assuming you execute as you plan to, you’ve given us a five year look on your CapEx etcetera. When do you think you would be in a position to relocate the dividend, is it all about just making sure that its maintained over this five years or do you see a scenario in that five year that you could potentially get comfortable about talking about dividend and increases of the company in that five year period?

Joseph M. Rigby

Well, I’ll just reemphasize what I always say, we’re committed to the current dividend. Obviously a lot of this would then depend on progress both on the regulatory front and then obviously we want to get to a place where we’re closer to, I’ll say more of a generally kind of peer looking payout ratio. So, I think it’s fair to say that for the near and mid term the current dividend payout is what folks ought to be looking at.

Ali Aka – SunTrust

And lastly, Fred remind us when at the earliest does equity come back into the equation for you guys?

Frederick J. Boyle

Right. For equity issuance, we’re not looking at any new equity until sometime beyond 2015,

Ali Aka – SunTrust

Okay, thank you.

Operator

Our next question will come from the line of Kit Konolige with BGC, please proceed.

Kit Konolige _ BGC Partners

Good morning.

Joseph M. Rigby

Good morning.

Kit Konolige – BGC Partners

So, can you tell us what the earned ROE was on an aggregate basis in ’13 and what let’s say as a thought experiment what the ROE would be at the two ends of the guidance range for ’14?

Frederick J. Boyle

The earned ROE for 2013 just at the PHI after adjusting for some of those unusual items was a little north about 6.3%. So, as far as the guidance range, I don’t have the earned ROE for that but we can calculate it based on that range and provide it to you.

Joseph M. Rigby

Okay, well obviously the e-part of the ROE for ’14 will have increased so presumably it could be up or down depending on the moving parts principally the results of the rate cases.

Yes, so I would expect that to up, the earnings are going up as we showed for ’13 versus ’12 and they’re going to go up again as our expectation for ’14 versus ’13 so you’re going to see some improvement there.

Kit Konolige – BGC Partners

Right and what are the softest parts of that ROE, is it Pepco Maryland and Ace?

Frederick J. Boyle

Well when you say the softest parts I think you actually know we go into all of our jurisdictions, we have filings going and so those will be the ones that will have those regulatory filings as far as the impact on the branch where we end up.

Kit Konolige – BGC Partners

Right. I just meant for ’13 which ended you know, where the lowest ROE is?

Frederick J. Boyle

The Ace itself has the lowest ROE. DPL and Pepco I think end up with pretty similar ones.

Kit Konolige – BGC Partners

ight. Okay fair enough. And on the CTA process in New Jersey, any sense of what’s going on with the holdup there. Is that, I mean these days everybody assumes that just about anything that happens in New Jersey politically is hostage to Governor Christy’s bridge issues? So is that part of this or is it just some unknown black box issue at the commission?

Frederick J. Boyle

Yes. Kit, we don’t speculate about all of that. We just continue to work with the BPU to continue the conversation to get this resolved.

Kit Konolige – BGC Partners

Okay. Fair enough. And then finally, can you give us a broad sense of with your projected rate base growth and to get to the elaborate terms, to earn the elaborate terms. Say over three to five year period, what kind of annual rate increases do you think we’d be looking at as to be getting there?

Frederick J. Boyle

As far as the specific annual rate increase that’s not a number I have to actually get to be allowed or authorized. I know at the Analyst Day and we’ll provide more information which looks at the lag by jurisdiction and we can provide more color around that as we’d noted in past. We believe there’s approximately $0.30 of lag embedded in our numbers today and when you extrapolate a number like that out, you’re going to be north of a $100 million of lag associated with our current investment structure. I mean our current, currently reflected in our rates.

Kit Konolige – BGC Partners

Right, that’s hundred million after tax?

Frederick J. Boyle

No, I’ll say $0.30 that would be north of a 100 pretax.

Kit Konolige – BGC Partners

Very good. Okay. Thank you.

Operator

Our next question will come from the line of Charles Fishman from Morningstar, please proceed.

Charles J. Fishman – Morningstar Inc.

Thank you. Just a follow up that question on the earned ROE for’13 if it was, okay 6.3% earned, the weighted average allowed is following high nine, any guess number on that?

Frederick J. Boyle

It’s 9.5 to 9.7.

Charles J. Fishman – Morningstar Inc.

Okay. And then, Pepco on the rounding, just brushing overview is that [indiscernible] anything?

Joseph M. Rigby

We expect the Mayor to sign the legislation very early next week and we don’t see a problem doing the just kind of the administrative review process congress provides.

Charles J. Fishman – Morningstar Inc.

Okay. Is there an annual tracker?

Joseph M. Rigby

It’ll be a tracker and that will be contemporaneous with the spending, so it will remain in place as we go through the construction and it will remain in place until it goes into the base rate.

Charles J. Fishman – Morningstar Inc.

But, are you are doing it rates could adjust more frequently than annually from it?

Joseph M. Rigby

No, they will be adjusted on an annual basis under the DC undergrounding the plan of course we have to get the financing order needs to be put in place but that is the intent of the understanding.

Charles J. Fishman – Morningstar Inc.

Okay. Then, I will suspect whether people did some heavy lifting on it, congratulations.

Joseph M. Rigby

Thank you.

Operator

Our next question will come from the line of Jessie Layton from Nexus Asset Management, please proceed.

Craig Lucas – Nexus Asset Management

Oh, hi. This is actually Craig Lucas. How you guys are doing?

Joseph M. Rigby

Good. Craig, how are you?

Craig Lucas – Nexus Asset Management

I’m good. I just want to go not to be the dead person, I wanted to go back to this issue of the earned ROEs, it looks like maybe Potomac or something like in the 8% and Delmarva was like maybe 7.5% and Atlantic is like 6.5%, does that sound like roughly the range what we were talking about in terms of 2013 actual?

Frederick J. Boyle

What I’m looking at has Ace at more, a little bit below 6 and Delmarva at a little north of 8.5 and then like you said that go up to about 8.

Craig Lucas – Nexus Asset Management

Okay and one of the things I would just want to say is that, I think it’s actually good in the sense that you guys have been showing steady improvement in these earned ROEs due to all that hard work that you guys have been doing, so it’s I don’t need to be critical of it, I just, you know, it’s been like a steady slow improvement. I think that sort of lot of the analysts like harping on though, the more anxious for more dramatic improvement in earned ROEs I think that’s a lot of it, seems like the sentiment that helped, I guess my question really has to do with and so I think that in terms of your legacy, Joe I just want to say I think that you’ve made a lot of improvements in the company while you are here so. And I mean to ask the question about the CEO search in any type of negative way.

But in terms of the criteria what we were looking for is the board focused on a continuation of the kind of the study improvement that we’ll see in a million dollar use in terms of trackers and that type of thing or is the board also considering other alternatives and maybe outside the box meaning the one of things that we saw clearly with the [Anstar] and new merger is that you had significantly under earning utilities that were chronically under earning and they were able to kind of correct all that few merger synergies and that is by having the companies themselves generate the rate relief that’s needed as opposed to need for constant rate relief is that. I think more out of the box in terms of a strategic combinations or things we generate, the synergies also being considered in this process of the search or are those things really off the table in terms of what we were looking at in terms of the changes that are coming up?

Joseph M. Rigby

Sure, Craig I think we’re just talking to what we said in the press release that the Board feels very, very good about the strategy to focus on the regulated T&D business . We see a lot of value creation both for our customers and our investors with what’s ahead of us just in what’s contemplated in the five year plan. We do look at I’ll say the evolution of technology and wanting to make sure that as we move from the current state into what some might call utility 2.0 that within that regulated construct that we are thinking about that. But, I do think that you should, look at this as a kind of continuation of this similar strategic focus as we go forward and looking for a person to carry that that forward.

Craig Lucas – Nexus Asset Management

But, why wouldn’t it make sense for example to not require any rate relief done forward and to combine this company with other T&D and harvest synergies in order to get a $0.30 uplift in earnings so the combined company could more dramatically be earning $0.30 right off the bad higher through synergies of cost-cutting. And then on top of that, you would have the growth and trackers which would then pick earnings incrementally up to an entirely new level beyond that. Why not lay off the rate release strategy and kind of self-correct it with synergies from a strategic combination? It’s just such a dramatic improvement that could commonly in the earned ROE right after that, that I don’t know whether the incremental approach to like fixing it through trackers and minimizing leg lag would have the same net present value of benefit to shareholders of a quicker fix?

Frederick J. Boyle

Well, Craig all I’ll say to that is that as you would expect the Board and this management team look at a whole range of alternatives. We always do that. What I’m communicating to you is that we are currently focused on executing this plan and that’s what the Board has tasked us to do.

Craig Lucas – Nexus Asset Management

Okay. Also congratulations and congratulations on the steady progresses we made today.

Joseph M. Rigby

Thanks so much.

Operator

Our next question will come from the line of Andy Levi from Avon Capital Advisors.

Andrew Levi – Avon Capital Advisors

Hello again. Just a few more just kind of number type questions, the equity ratio did that drop 2% from a 12 or I’m missing something and did the equity actually go down a $100 million?

Frederick J. Boyle

Well, the equity itself did go down year-over-year because of the charges we took earlier associated with the cross quarter leases and what not. So that did drive down equity. I’d have to get to as far as any change in the ratio itself. Our plan is to maintain the ratio as we have in the past which at the PHI Consolidated level is to maintain approximately 45% of equity there and at the utilities, it’s closer to 50:50.

Andrew Levi – Avon Capital Advisors

Got it. Perfect. And then, I don’t know if we get this on the Analyst Day or not, is there any guidance on operating cash flow for 2014?

Frederick J. Boyle

At the Analyst Day we will provide a slide on that. We’ll talk about that.

Andrew Levi – Avon Capital Advisors

Perfect. Thank you guys.

Frederick J. Boyle

Okay.

Operator

And our last question will come from the line of Jonathan Reader from Wells Fargo, please proceed.

Jonathan Reader – Wells Fargo

Hey, one quick clear clarification, you indicated you were going to file on New Jersey in March, so if the CTA adjustment is resolved, a longer timeline you’re indicating, would that be reflected in the rate case presumably?

Joseph M. Rigby

Our expectations is, is that it would be reflected in the rate case any outcome that, as it relates to the CTA, that came out after we had made the filing would be part of the filing, you know, which would be used to develop the rates for that March filing.

Jonathan Reader – Wells Fargo

Okay, great, thanks.

Operator

And with no further questions, I would now like to turn the call back over to Joe Rigby for closing remarks.

Joseph M. Rigby

Okay, thanks operator and again thank you for joining us and for your interest in PHI. Hopefully you know that our annual analyst conference is scheduled for March 21st in New York and if you haven’t received an invitation, please contact Donna and our investor relations staff and I hope for the analyst in the call will be able to join us, and with that have a great day.

Operator

Ladies and gentlemen that includes today’s presentation, you may now disconnect, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pepco Holdings' CEO Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts