Pepco Holdings' (POM) CEO Joseph Rigby on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Pepco Holdings, (POM)

Pepco Holdings (NYSE:POM)

Q1 2014 Earnings Call

May 07, 2014 10:00 am ET


Donna J. Kinzel - Chief Risk Officer, Vice President and Treasurer

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

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


Matthew Davis - Crédit Suisse AG, Research Division

Charles J. Fishman - Morningstar Inc., Research Division


Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Pepco Holdings, Inc. Earnings Conference Call. My name is Denise, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Donna Kinzel, Vice President and Treasurer. Please proceed.

Donna J. Kinzel

Thank you, Denise, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings First Quarter 2014 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. 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 filing and found on Slide 2 of our presentation.

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


Joseph M. Rigby

Thanks, Donna. Good morning, ladies and gentlemen, and thank you for joining us today. As we have reported on April 29, the definitive merger agreement was signed between Pepco Holdings and Exelon Corporation. The merger will create the leading Mid-Atlantic electric and gas utility serving 10 million customers, with a rate base of approximately $26 billion. As part of the transaction, Exelon has committed to continuing investing in our infrastructure to build on the significant improvements in system reliability, customer service and outage restoration, already achieved by our 3 utilities. The merger requires the approval of our stockholders, the Department of Justice and regulators, including the Federal Energy Regulatory Commission and the public service commissions in each of our 4 jurisdictions. The transaction is expected to close in the second or third quarter of 2015.

On today's call, we will focus on a review of Pepco Holdings' first quarter results. As seen on Slide 3, for the 3 months ended March 31, 2014, the GAAP earnings from continuing operations were $75 million as compared to a net loss of $111 million in the first quarter of 2013. Excluding items that we feel are not representative of our ongoing business operations, adjusted earnings for the continuing operations for the 3 months ended March 31, 2013, would've been $56 million. The most significant driver of the 34% increase in adjusted earnings quarter-over-quarter was higher electric distribution revenue, resulting from higher rates driven by increased infrastructure investment, while our operation and maintenance expense and higher weather-related sales in our service territories that do not have revenue decoupled from sales also contributed to the increase in earnings for the quarter.

The impact of favorable income tax adjustments in 2013 and higher depreciation expense partially offset the earnings increase quarter-over-quarter. The increase in earnings for the first quarter of 2014 reflects the impact of investments we have made resulting in a more resilient electric system throughout our service territories. Later in the call, Fred will address the financial results in more detail. But first, I'll address some topics of interest.

Last month, Power Delivery modified its capital expenditure forecast for the years 2014 through 2018 to include $157 million of expenditures for 3 additional transmission projects, as seen on Slide 4. The first initiative is a $40 million project to improve physical security at various substations throughout our jurisdictions. This project is expected to be completed in 2015.

The second project consists of construction of a new 230 kV tie between Pepco and Dominion Virginia Power. PHI's portion of the project consists of modifications to the existing substation where the cable terminates and is estimated to cost over $75 million. The project will take 4 years to complete.

The third addition involves the expansion of an existing substation caused by the retirement of a Deepwater generating plant in New Jersey, with estimated expenditures of over $40 million. We expect to complete that project in 2017. The cost associated with each of these initiatives will be recovered in formula rates.

In addition, the $1 billion District of Columbia undergrounding legislation became law on May 3. Cost recovery will be through as customer surcharge. Funding for the project will be divided evenly between Pepco and the District of Columbia.

Public Service Commission approval of the financing and surcharge applications associated with the legislation is expected in the fourth quarter of this year. Pepco estimates minimal expenditures in 2014, approximately $50 million in 2015 and $75 million for each of the years 2016 through 2018. The passage of this legislation represents a collaborative effort by the District of Columbia government officials, Public Service Commission, the Office of People's Counsel community members and Pepco.

Slides 5 through 8 provide the details of the 2 recent electric distribution rate case decisions and the 2 pending electric distribution base rate cases.

On April 2, the Public Service Commission approved the $15.1 million annual increase in Delmarva Power's electric distribution base rates based on a 9.7% return on equity. The new rates were effective on May 1. As permitted by Delaware law, Delmarva Power implemented interim rate increases of $2.5 million on June 1 and $25.1 million on October 22 of last year. The excess amount collected will be returned to customers.

On March 26, the District of Columbia Public Service Commission approved a $23.4 million increase in Pepco's electric distribution base rates based on a 9.4% return on equity. The new rates were effective on April 16.

On March 14, Atlantic City Electric filed an electric distribution base rate case in New Jersey. The filing seeks approval of an annual rate increase of $61.7 million, based on a requested return on equity of 10.25%. An order establishing the procedural schedule is expected mid-month.

Pepco's current electric distribution base rate case pending in Maryland seeks approval of an annual increase of $37.4 million, based on a return on equity of 10.25%. Hearings concluded on April 29, and a decision is expected in the third quarter. Under the merger agreement, we will continue to pursue the conclusion of pending regulatory matters, but will not be filing additional electric or gas distribution base rate cases in our jurisdictions without Exelon's consent.

Now turning to Slide 9 of Pepco Energy Services. For the 3 months ended March 31, PES signed $17 million in energy efficiency contracts and $32 million in underground transmission construction contracts as compared to $1 million and $11 million of contracts, respectively, in the first quarter of 2013.

The ESCO market continues to show signs of recovery, while the underground transmission construction market remained strong, driven by utility infrastructure and reliability spending, with significant bidding activity, many projects in progress and a healthy pipeline of prospective projects. PES continues to expect 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 recap our earnings, address our performance by operating segment and then open the call to your questions.

As shown on Slide 10, GAAP earnings from continuing operations for the first quarter of 2014 were $0.30 per share compared to a net loss of $0.47 per share for the first quarter of 2013. The 2013 period includes interest associated with the change in assessment of corporate tax benefits related to the former cross-border energy lease investments and charges related to a valuation allowance on certain deferred tax assets. Excluding these items, our first quarter 2013 adjusted earnings from continuing operations would've been $0.24 per share.

A summary of the drivers of our financial results for the quarter can be found on Slide 11.

Power Delivery earnings were $0.31 per share for the 3 months ended March 31 compared to $0.24 per share for the same period in 2013. Higher distribution revenue, primarily due to higher rates driven by increased investment in utility infrastructure, increased earnings by $0.06 per share, and lower operation and maintenance expense increased earnings by $0.04 per share.

The lower O&M was largely due to the winter weather in the first quarter this year impacting the timing of planned system maintenance. We expect these activities will take place throughout the remainder of the year. Higher weather-related sales in our service territories that do not have revenue decoupled from sales increased earnings by $0.03 per share, with heating degree days up 13% in the 2014 quarter. Items that decreased earnings per share quarter-over-quarter were favorable income tax adjustments of $0.05 per share in 2013 that did not recur in 2014, and higher depreciation and amortization expense of $0.03 per share associated primarily with increased plant investment in regulatory assets, partially offset by lower depreciation rates.

At our analyst conference in March, we provided a forecast of total 2014 Power Delivery O&M expense. Although the timing of some of the projected expenditures was impacted by weather in the first quarter, we continue to expect that 2014 O&M expense will be within the range of $890 million to $910 million.

Pepco Energy Services earnings per share were breakeven for the first quarter of 2014 as compared to $0.01 per share for the same period in 2013. The decrease in earnings was driven by lower underground transmission and distribution construction activity due to the impact of the winter weather in the first quarter of this year.

In corporate and other, which consists of unallocated corporate costs in the remaining PCI investments not related to the cross-border energy leases, the net loss of $0.01 per share for both periods, given the adjustment for the 2013 quarter I discussed earlier.

Now I'll turn to topics of interest for 2014. On March 18, Pepco issued $400 million of first mortgage bonds, which bear interest at an annual fixed rate of 3.6% and are due on March 15, 2024. Pepco used a portion of the net proceeds to repay in full at maturity $175 million of 4.65% first mortgage bonds due April 15. The balance of the proceeds which used to repay commercial paper.

Turning to Slide 12. We reaffirm our 2014 earnings guidance range from continuing operations of $1.12 to $1.27 per share. The guidance range assumes normal weather conditions and excludes the results of discontinued operations, the impact of any special unusual or extraordinary items, the effects of adopting any new accounting standards, of changes in tax law, the impairment of assets and any merger and integration costs associated with the planned merger with Exelon.

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

Joseph M. Rigby

Thanks, Fred. I'm pleased with the first quarter results. As we move forward in the approval process of the merger with Exelon, we will remain focused on our strategy of investing in infrastructure to achieve operational excellence and exceed customer expectations.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from Dan Eggers with Crédit Suisse.

Matthew Davis - Crédit Suisse AG, Research Division

It's actually Matt Davis. Just a quick question. The 10 -- the Q says, and you guys said on the call that you can't file any additional rate cases without the consent of Exelon. However, on the call last week, Exelon stated that the merger was predicated on Pepco's current business plan as was laid out during the Analyst Day. So should we assume that you are still going to go ahead with the 3 remaining rate cases that were originally planned for this year?

Frederick J. Boyle

This is Fred. Yes, at this time, we do not plan to file any new cases. We plan to continue to pursue the pending cases that are currently filed.

Matthew Davis - Crédit Suisse AG, Research Division

Okay. And just a clarification. How come the D.C. undergrounding CapEx is not currently in the, I guess, formal CapEx plan? What is -- is it just the regulatory approval that's holding that back?

Frederick J. Boyle

That's right. We're waiting on that, then we'll add that into the -- our CapEx plan.


Our next question comes from Charles Fishman with Morningstar.

Charles J. Fishman - Morningstar Inc., Research Division

Actually, Matt asked my one question, but I did have another one. I don't recall on your conference call, joint conference call on April 30, there's no reopener or go-shop period in this agreement, is there?

Frederick J. Boyle

No, there's not.


We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Joseph M. Rigby

Okay. Thanks, operator, and again, thank you for joining us, and we wish everyone a good day. Take care.


This concludes today's conference. You may now disconnect. Have a great day.

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