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Pepco Holdings (NYSE:POM)

Q4 2010 Earnings Call

February 25, 2011 10:00 am ET

Executives

Donna Kinzel - Director of Investor Relations and Assistant Treasurer

Anthony Kamerick - Chief Financial Officer, Senior Vice President, Chief Financial Officer of Potomac Electric Power Company, Chief Financial Officer of Delmarva Power and Light Company, Chief Financial Officer of Atlantic City Electric Company, Senior Vice President of Potomac Electric Power Company and Senior Vice President of Delmarva Power and Light Company

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

Analysts

Paul Ridzon - KeyBanc Capital Markets Inc.

Paul Patterson - Glenrock Associates

Neil Kalton - Wells Fargo Securities, LLC

James Dobson - Wunderlich Securities Inc.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Dan Jenkins - State of Wisconsin Investment Board

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Pepco Holdings Inc. Earnings Conference Call. My name is Larissa, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Mrs. Donna Kinzel, the Director of Investor Relations. Please go ahead.

Donna Kinzel

Thank you, operator, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings Fourth Quarter 2010 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; 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 special items and their 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 Rigby

Thanks, Donna, and good morning, ladies and gentlemen, and thank you for joining us today. 2010 was a year of transformation for PHI. The sale of Conectiv Energy's generation assets and the exit from the merchant power business repositioned PHI as fundamentally a regulated utility company, a company focused on delivering reliable service and meeting customer expectations. The sale improved our business risk profile, lowered capital and collateral requirements, strengthened our credit profile and reduced earnings volatility. The year was also marked by steady progress on our key initiatives for the regulated business. Our plans for a Smart Grid are moving forward as we continue with meter installations in Delaware and the District of Columbia.

Our build out of utility infrastructure is also progressing with $765 million in capital invested in the regulated business in 2010 including $226 million in transmission. Given this level of investment, we recognized the need to minimize regulatory lag and modified our approach to the rate case process with our most recent filing in Maryland. 2010 was a year in which we clarified our strategic vision as well as our value proposition for our customers and investors.

Earnings from continuing operations for 2010 were $0.62 per share compared to $1.01 per share in 2009. Excluding special items in both periods, earnings would have been $1.24 per share in 2010 compared to $0.85 per share in 2009. Our operating results were driven by Power Delivery earnings that reflect the positive impact of our infrastructure investments, regulatory outcome and higher sales in our non-decoupled service territories. Lower interest expense resulting from the pay-down of parent company debt with Conectiv Energy's generation asset sale proceeds and income tax adjustments also boosted earnings. The results of the Conectiv Energy segment are accounted for as discontinued operations.

As seen on Slide 3, our 2010 earnings guidance was a range of $1 to $1.10 per share. Several factors contributed to our results being in excess of our own guidance. As we noted in our third quarter 2010 Earnings Conference Call, this range assumed a reversal of $0.07 of earnings per share from unbilled revenue related to Atlantic City Electric's basic generation service. In our results, only $0.04 per share reversed during the fourth quarter of 2010 leaving us with $0.03 per share in annual earnings related to Atlantic City Electric's basic generation service. Also in the fourth quarter of 2010, we recognized earnings of $0.07 per share related to a tax settlement with the Internal Revenue Service that was reached in the fourth quarter for the tax years 2001 and 2002. This tax settlement was not contemplated in the guidance range. Later during the call, Tony will address the settlement in more detail along with the financial results and our operating segment performance, but first I'll address some topics of interest.

In 2010, we made great strides in implementing the blueprint for the future. The status by jurisdiction can be seen on Slide 4. About 215,000 advanced meters have been installed in Delaware for our electric and gas customers, and we expect to complete all of the meter exchanges in Delaware in the second quarter of 2011. We began activating meters in October and plan to have all Delaware meters activated in the third quarter. The initial functionality includes remote meter reading, billing and outage notification. In the District of Columbia, we began the deployment of advanced meters in October with a goal of having the installations completed by the end of 2011. As approved by the Commissions in Delaware and the District of Columbia, regulatory assets have been created to assure recovery of and a return on AMI-related cost between rate cases.

In Maryland, the Public Service Commission also approved the creation of a regulatory asset for AMI-related cost. For Pepco, the Commission approved the deployment of advanced meters subject to the implementation of a Commission-approved customer education and communication plan. Pepco's proposed plan was approved by the Commission last week and we intend to begin meter installations in June from Pepco's Maryland customers. For Delmarva Power, the Maryland Commission deferred its decision on the deployment of advanced meters pending review and approval of an amended business case. We filed the business case in December, the procedural schedule has not yet been established.

Through the build out of the Smart Grid, we will gain added tools to improve system reliability while providing customers with access to detailed usage information that will enable them to better manage their energy use and lower their energy bills. Our energy efficiency and demand side management programs will also help our customers to reduce energy cost. The cost of these programs will be recovered through DSM-related rate adjustment mechanisms.

2010 was a very busy year on the regulatory front with decisions in four distribution base rate cases since the end of 2009 and the filing of two additional cases. The details of the decided cases can be seen on Slides 5 and 6. In total, an annual increase of $64 million in electric distribution base rates was authorized in the four decided cases. Delmarva Power's electric case in Delaware was the most recently decided. On January 18, the Commission approved a $16 million annual increase in distribution base rates based on a 10% return on equity. The new rates were effective February 1.

Delmarva Power's request had been for an increase of $24 million. As permitted by Delaware law, Delmarva Power implemented, subject to refund, $2.5 million of the proposed rate increase in November 2009 and the balance in April 2010. The excess amount collected is being returned to customers which will impact cash flow but not earnings. The Commission deferred its decision on revenue decoupling pending Delmarva Power's development of an implementation plan including the plan for customer education.

Slides 7 and 8 provide the details of the pending cases. On February 9, Delmarva Power, the Commission Staff and the Attorney General entered into a proposed settlement agreement in Delmarva Power's natural gas delivery base rate case in Delaware. The proposed settlement provides for an annual rate increase of $6 million for service rendered on and after April 1, 2011. The stated return on equity is 10%. The parties agreed to defer the request to place revenue decoupling into effect until an implementation plan has been developed. The proposed settlement agreement is subject to final review and approval by the public service commission. And a decision is expected by the end of March.

Delmarva Power implemented interim rate increases of $2.5 million on August 31 and $7.7 million on February 2. The excess amount collected will be returned to customers. On December 21, Delmarva Power filed a distribution base rate case in Maryland seeking approval of an annual rate increase of $18 million based on a 10.75% return on equity. This filing includes comprehensive discussion on the topic of regulatory lag and its negative effects, as well as a proposal for the adoption of two mechanisms to reduce regulatory lag. The first is a reliability investment recovery mechanism, which provides full and timely recovery of future capital investments related to distribution system reliability. And the second is an annual rate review process, which would adjust rates annually using actual financial data and a return on equity approved in the most recent case to calculate a revenue requirement. This revenue requirement would then be the basis for any adjustment to rates. Hearings on the case are scheduled to begin May 31, with a decision expected in July of this year.

As we previously reported in October, PJM reaffirmed the need for a mid-Atlantic power pathway or MAPP transmission project, with a one-year delay in the in-service date to June 1, 2015. The estimated total cost of the project remains $1.2 billion. PJM currently is in the annual process of reassessing reliability requirements for the region under its Regional Transmission Expansion Plan process. This reassessment includes the incorporation of a revised load forecast that is significantly lower than the load forecast used in prior studies. PJM's reassessment is expected to be completed this spring and will determine if there will be any further delay in the in-service date for the MAPP project.

Meanwhile, as seen on Slide 9, we continue to move forward with seeking the required regulatory approvals for the project with the support of PJM. We filed an updated application for a Certificate of Public Convenience and Necessity or CPCN with the Maryland Public Service Commission in November. A procedural schedule has been set with hearing scheduled to begin on September 6 and a final order expected in January, 2012. Field reviews with state and federal environmental agencies are substantially complete for the Southern Maryland portion of the line and we plan to file for the Maryland state environmental permit in the second quarter of 2011.

Our projected capital expenditures are shown on Slide 10. Over the next five years, we expect to spend $3.1 billion on electric distribution, gas delivery and our blueprint for the future initiatives. These investments are aimed at improving reliability, enhancing customer service, meeting load growth and implementing AMI. In addition to the MAPP project, we expect to spend almost $1 billion on transmission infrastructure over this time period 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 returns on equity of either 11.3% or 12.8%.

At Pepco Energy Services, profitable wind down of the Retail Energy Supply business continues to be on track, and we are making good progress in growing the Energy Services business. As seen on Slide 11, PES signed $169 million of new energy efficiency contracts in 2010 including large contracts with BWI Thurgood Marshall Airport, the Marine Corps and Prince George's County schools in Maryland. As seen on Slide 12, in December Pepco Energy Services entered into a contract to construct a 2.2-megawatt solar electric generating system for New Jersey's Atlantic Cape Community College at two of its campuses. Installation is expected to begin in May and to be completed in November. The solar photovoltaic system will generate almost half of the campuses’ electricity consumption.

Since 1995, Pepco Energy Services has evolved to become one of the leading providers of energy efficiency and renewable energy services. We believe the benefits of energy efficiency provide long-term growth opportunities for this business, and we can grow Pepco Energy Services in a manner that is consistent with our lower risk profile. Before I turn it over to Tony, I want to address the impact of a recent storm that hit our service territories. In late January, we were hit by a severe winter storm that included heavy snow and ice. In the days that followed the storm, we restored service to approximately 250,000 customers, most of which were in the Pepco service territory. We currently estimate the cost of storm restoration to be approximately $15 million with 1/2 to 2/3 being expensed and the balance being charged to capital.

Pepco's response to the storm has been criticized by customers and elected officials and received significant media attention. Earlier this month, lawmakers in Maryland introduced legislation to increase utility reliability by directing the Public Service Commission to establish reliability standards for Maryland electric companies. In August 2010, the Commission initiated a proceeding to investigate the reliability of Pepco's electric distribution system. The Commission recently expanded the scope of issues in the proceeding to include potential remedial action and has also proposed reliability standards.

In the fall of 2010, we announced a six-point enhanced reliability plan for Pepco aimed at reducing both the frequency and duration of outage. The capital portion of the plan is reflected in the five-year forecast I discussed earlier. We will routinely assess this plan to determine the extent to which it can be accelerated and our major focus in 2011 will be on improving reliability. We will address our expected operation and maintenance expense at our upcoming analyst conference.

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

Anthony Kamerick

Good morning, and thank you for joining us today. I'll recap our earnings, address our performance by operating segment and discuss some topics of interest for 2011 including our earnings guidance. We will then open the call to your questions.

Our results for both the quarter and year-to-date periods show Conectiv Energy's results as discontinued operations. For the full year 2010, Pepco Holdings incurred an after-tax loss of $107 million from discontinued operations. This loss reflects the sale of the wholesale power generation business as well as the liquidation of substantially all of Conectiv Energy's remaining assets and businesses. No material amount of gain or loss is expected to be recognized from the liquidation of the few remaining assets and liabilities held in Conectiv Energy.

Slide 13 summarizes our earnings for the full year and fourth quarter of 2010. Earnings from continuing operations for the full year of 2010 were $139 million or $0.62 per share compared to $223 million or $1.01 per share for the full year of 2009. There were three special items recorded in the 2010 period. The first is a $113-million after-tax charge for debt extinguishment costs that were incurred due to the early redemption of parent company debt primarily with the proceeds from the Conectiv Energy generation sale. The second is an $18 million after-tax restructuring charge related to an organizational review and the third is a $6-million after-tax charge due to the issuance of an order in the District of Columbia related to Pepco's divestiture of its generating assets in the year 2000. Note that we have filed an appeal of this order, which if successful, could result in a recovery of some or all of the charge.

In the 2009 period, we recognized after-tax gains related to the Mirant bankruptcy settlement. We also recognized in Maryland state income tax benefit due to a change in the tax reporting for the disposition of certain assets in prior years. Excluding the special items, earnings from continuing operations for the full year 2010 would have been $276 million or $1.24 per share compared to $188 million or $0.85 per share in 2009.

For the fourth quarter of 2010, earnings from continuing operations were $14 million or $0.06 per share compared to $39 million or $0.17 per share for the fourth quarter of 2009. Excluding the debt extinguishment costs and the restructuring charge, earnings from continuing operations for the 2010 quarter would have been $56 million or $0.25 per share. A summary of the drivers of our financial results can be found on Slide 14.

As Joe mentioned in the fourth quarter of 2010, we reached a tax settlement with the Internal Revenue Service for the tax years 2001 and 2002, which affected our tax provisions as far back as 1996. This tax settlement covered all open issues for those years except for the cross-border leases. The estimated interest due to the IRS under the settlement was recalculated resulting in the reversal of $15 million of accrued interest after tax. This reversal increased earnings for the quarter and full year by $0.07 per share and primarily affected the Power Delivery segment. Though we do not expect an adjustment of this magnitude every year, until the IRS becomes more current with its audits, we can expect some level of adjustments as we reach settlements with the IRS in closed tax years.

Power Delivery earnings excluding special items were $1.03 per share for the full year 2010 compared to $0.74 per share in 2009. Higher distribution rates during the year increased earnings by $0.11 per share. The higher rates reflect the impact of rate-case decisions for Pepco in the District of Columbia and Maryland, Delmarva Power in Maryland and for Atlantic City Electric. The higher rates also reflect the interim rates put in place for Delmarva Power in Delaware.

Higher sales due to higher cooling degree days versus the prior year increased earnings by $0.07 per share. Cooling degree days were up 48%. Keep in mind that our distribution revenue in Maryland and the District of Columbia, which represents approximately 2/3 of total distribution revenue is decoupled from consumption and therefore is not impacted by temperature variations. Higher transmission revenue drove $0.10 per share of the earnings increase due to a higher investment in transmission assets. Also driving higher Power Delivery earnings was the adjustment related to the federal income tax settlement that I referred to earlier.

Partially offsetting these increases was higher operation and maintenance expense, which reduced earnings by $0.12 per share year-over-year. Higher restoration activity due to several severe storms in 2010 cost about $0.05 of this earnings decrease. Higher tree trimming and environmental remediation costs were also factors partially offset by lower pension expense.

For the fourth quarter of 2010, Power Delivery earnings excluding special items, were $0.24 per share compared to $0.14 per share for the fourth quarter of 2009. The higher earnings in the 2010 quarter were driven by higher distribution and transmission revenue due to higher rates in effect, higher sales and the adjustment related to the federal income tax settlement. Higher Power Delivery operation and maintenance expense partially offset the earnings increases. Pepco Energy Services full year 2010 earnings were $0.16 per share compared to $0.18 per share in 2009. Fourth quarter earnings were $0.03 per share as compared to $0.04 per share for the 2009 quarter. The decrease in earnings during both periods was due to lower retail electricity sales volumes due to the ongoing wind down of the Retail Energy Supply business and higher operation and maintenance expenses for the Thermal Services business partially offset by higher generation output and lower interest expense.

In our corporate and other segment, which is primarily unallocated corporate costs, earnings improved by $0.15 per share year-over-year excluding special items. The earnings improvement is due to the favorable state income tax effect resulting from the corporate restructuring involving certain PHI entities as well as lower interest expense due to the pay-down of parent company debt with the proceeds from the Conectiv Energy generation asset sale. Quarter-over-quarter, earnings improved by $0.01 per share driven by lower interest expense. Now I'll turn to some topics of interest for 2011.

For 2011, we estimate the pension and other post-retirement benefit costs to be approximately $107 million across PHI as compared to $116 million in 2010. Historically about 70% of this amount is reflected in our operating expenses with the balance charged to capital. So as seen on Slide 15, we estimate that the pension and other post-retirement benefit expense will be approximately $75 million in 2011 as compared to $81 million in 2010. Additionally, although we project there will be no minimum funding requirement in 2011 under the Pension Protection Act, in accordance with our policy, we currently plan to make a discretionary tax-deductible contribution in 2011 of up to $150 million to bring the plan assets to at least the full funding level under the Pension Protection Act. The utility subsidiaries’ obligation for funding the plan is expected to be approximately 80% of this contribution. We made a $100 million contribution to the pension plan in 2010.

Late last year, legislation was passed to extend bonus depreciation through 2012. We expect to be in a net operating loss position for income tax purposes for at least 2011 and 2012. Therefore the cash flow benefit from bonus depreciation will be delayed but realized in future years. We plan to provide an update of our forecasted cash flow and financing plans in our upcoming analyst conference.

Slide 16 and 17 show our earnings guidance for 2011 and expected major earnings drivers. Our 2011 earnings guidance range for ongoing operations is $1.10 to $1.25 per share. The guidance range excludes the results of discontinued operations and the impact of any special, unusual or extraordinary items. The guidance range also excludes the net mark-to-market effects of economic hedging activities at Pepco Energy Services. As we wind down the retail energy business, we are experiencing more hedge in effectiveness as the result of smaller loads and expect to experience some mark-to-market fluctuations over the next couple of years. Note that the guidance range takes into account the incremental storm expense that Joe mentioned earlier.

Looking at our range for 2011 versus actual results for 2010, significant drivers that are expected to have a positive impact on earnings include the annualization of interest savings resulting from debt retirement in 2010, which is expected to increase earnings by $0.12 per share and the annualization of 2010 distribution rate increases, which is expected to increase earnings by $0.05 per share. Also keep in mind that we incurred incremental storm costs of $0.05 per share in 2010.

A factor that will negatively impact earnings in 2011 is the $0.11 per share of earnings in 2010 resulting from income tax adjustments. Other factors that are expected to have a negative impact on earnings in 2011 as compared to 2010 include higher depreciation and amortization expense of approximately $0.07 per share from infrastructure investments and the assumed reversal of unbilled revenue related to Atlantic City Electric's basic generation service which contributed $0.03 per share to earnings in 2010. Our guidance range also assumes normal temperatures.

Higher cooling degree days as compared to normal contributed $0.03 per share to earnings in 2010. And finally, the range also takes into consideration the incremental storm costs related to the January storm that Joe referred to, which we estimate to be approximately $0.02 per share.

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

Joseph Rigby

Thanks, Tony, and in closing, I'm pleased with our progress to reposition PHI as a fundamentally regulated business. We have laid the foundation for significant utility and infrastructure investments that will benefit our customers and investors. Our annual analyst conference is scheduled for April 7 and 8 here in Washington D.C.

At the conference, the Executive team will provide a detailed review of our businesses and discuss progress towards our strategic initiatives. I hope the analysts on the call will be able to join us. If you have not yet received an invitation, please contact our Investor Relations staff.

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

Question-and-Answer Session

Operator

[Operator Instructions] You have your first question from the line of Paul Patterson from Glenrock Associates.

Paul Patterson - Glenrock Associates

The RTEP review with respect to transmission of PJM, do you think that there's any potential for delay of MAPP again or any thoughts there?

Anthony Kamerick

I would tend to think, Paul, that sitting here today given kind of the softness in the load forecast, I think it's probably more likely that you would see a delay but it's probably a little too early for us to try to peg what that outcome might be.

Paul Patterson - Glenrock Associates

So when we look at the CapEx number, I guess they could change depending on that specific issue. What we're looking at now is an expectation, the 2015 expectation, is that still correct?

Anthony Kamerick

The one thing I would say is that and this is similar to the conversation we had last May when we had the analyst conference is that, we have kind of a fairly significant backlog of infrastructure spend that we would plan to pull forward if, in fact, we saw some delay that caused us to recast the CapEx as a result of MAPP.

Paul Patterson - Glenrock Associates

The second issue is you guys touched on this with respect to the outages last year, but there is a -- I mean, from just an outsider's perspective, the locals seem to be a bit restless down there politically. I just saw on the Washington Post today sort of them going after the Chamber of the Maryland PSC at the State Legislature. As you know, there's several bills in the Maryland State Legislature. I mean, I haven't seen anything and I'm sure you guys are much more on top of this. I guess what I'm trying to get a sense of though, is how many of these bills do you think are really potentially possible for passage? The franchise bill, I don't really know what the impact of that kind of thing would be. Just how do we think about this? There's discussion about decoupling and how that might be problematic with extended outages and it does quite frankly that they’re sort of out for blood. I mean, how do we think about this? And how do we, as investors, sort of handicap what's going on?

Joseph Rigby

This is Joe, let me make a couple of comments. This is priority one for us. The issues around reliability, I've said this several times in public settings that we are absolutely committed, if you just think about the repositioning we've gone through. For us success is very clear in terms of us improving the reliability of the system. We are deeply involved in tracking all of the issues that you mentioned, I will make a couple of comments. I would fully expect that not dissimilar to what we have in our other jurisdictions that the state of Maryland will, in fact, establish reliability standards, and we're not going to be in opposition to that. We want to be a full participant in the development of those standards and to make sure that all the parties have a very thorough vetting of all the issues that come along with that. But from a directional point of view, we fully expect that outcome. With respect to the discussion on the BSA, I think that one comment I would make there is that, what's being discussed around that is a component within the BSA that exists in the state of Maryland, which is intended to reflect outages during or reflect revenue during outages. And I fully expect that the Maryland PSE is going to work -- we're going to work our way through that issue in a very acceptable manner. The issue just on the franchise, I want to be really clear about that one. We're very much cognizant of the fact that it's been mentioned but obviously, we would vigorously oppose that as we take great pride and take it very seriously that this is who we are, these are our customers. So as it relates to someone raising the issue around our franchise, that would be one that we would oppose very, very vigorously. But I would tell you that the full force of the company is in monitoring this and I think most fundamentally, working to execute the reliability enhancement plan that I mentioned to improve service to our customers.

Paul Patterson - Glenrock Associates

So the reliably enhancement plan, I guess I'm wondering, is there a large amount of O&M that's going to be associated with that? Or is it going to be capitalized in terms of -- I mean, in our guidance should we assume that those costs for reliability improvements, et cetera are completely in there or is that something that might change guidance?

Joseph Rigby

No. Based on what we think and as we're looking at the business, we've already factored I think two things into the guidance, Paul, to think about. One is Tony mentioned the impact of the storm, so we’ve kind of baked that in there. But we have, we'll get into more detail at the analyst conference but we've increased our projected spend on tree trimming and that's already baked into the guidance.

Paul Patterson - Glenrock Associates

Back to the franchise bill, what would actually happen here, obviously it seems like an extreme situation I wonder about legality of it, but would they have to compensate you if they were going to take away the franchise? I mean how -- just mechanically is this -- how does that sort of work?

Anthony Kamerick

I think it’s a little premature to try to speculate how it's going to work. I think that we ought to let this one mature a little bit and we could talk about it as it proceeds.

Operator

And your next question comes from the line of Paul Ridzon from KeyBanc Capital Markets.

Paul Ridzon - KeyBanc Capital Markets Inc.

Joe, could you -- I think I missed what you said about MAPP and the potential for delay given the load forecast. Did you say you think it's more likely than not that MAPP gets delayed again?

Joseph Rigby

I think that sitting here, looking at the softness -- Paul, this is Joe. I think the softness in what we've seen in the load forecast, I think our sense is that it could get pushed out but it's hard for me to say how far it would be. The process itself is going to get further defined probably by the latter part of March or early April. So I think we'll be able to give you a little bit more color there. But I also would want to tell you that in terms of how we're acting and the efforts underway, we're proceeding with the current plan. And as I mentioned, we filed the CPCN, we're moving ahead with the related environmental work, but I think in the interest of just trying to give you the lay of the land, I think it might be a little overly optimistic to think that 2015 is going to be the date.

Paul Ridzon - KeyBanc Capital Markets Inc.

If it were pushed out by PJM, do you have the uses for the -- can you backfill with that capital to kind of generate some cash flow?

Joseph Rigby

I think, Paul, that was probably another part of my commentary that you missed. In fact, we started talking about this issue last May at the analyst conference and we've got a fairly detailed view of CapEx opportunities to backfill, should we be looking at some level of delay from MAPP. Once we get more clarity on the timing of MAPP, coincidentally, we’ll be able to give you that color on how we might be looking at CapEx going forward.

Paul Ridzon - KeyBanc Capital Markets Inc.

And Tony, when you gave guidance in December or an outlook in December, obviously you didn't know about the storms and I believe you probably expected that the BGS unbilled would fully reverse, is that fair?

Anthony Kamerick

Yes, that is all fair, yes.

Paul Ridzon - KeyBanc Capital Markets Inc.

So those two things look a nickel worse than you do in December?

Anthony Kamerick

Yes, that's true.

Operator

And your next question comes from the line of Ali Agha from SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Looking at the CapEx numbers, the current CapEx numbers. I know that MAPP is kept on the same budget that you've laid out before. But it seems to me that in total, the Power Delivery CapEx numbers may have come down particularly in the outer years versus what you have given us previously? Am I correct in that and what's causing that?

Joseph Rigby

Ali, this is Joe. As we put together the reliability enhancement plan, we wanted to accelerate a pretty good chunk of the distribution level spend and that's what's modifying those out years.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And the impact of bonus depreciation on rate base, Tony, can you give us a sense of does that change, the rate base numbers and how does the rate base growth numbers now look given your latest CapEx budget here?

Anthony Kamerick

Ali, we will probably provide you with a much more detailed view of that at our analyst conference, but the fact that we have these net operating losses in 2011 and into probably 2012, we don't see it impacting the rate base that much because the deferred tax element of rate base is supposed to represent non-investor supplied capital and if we're not getting that capital then it won't affect the rate base.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Also, there are not that many rate cases that are going to impact you in '11, most of the big ones will start impacting you in '12. You have some that did close late last year or early this year. Should we assume that regulatory lag in '11 does not get a big dent and then related to that, could you just remind us what was the final earned ROEs in your portfolio in '10 versus allowed ROEs, where was the lag currently?

Joseph Rigby

Ali, this is Joe. I think that it's probably fair to think that given the Delmarva Maryland case that I outlined where we've introduced these two mechanisms, I think it's fair to think that you'll start to kind of chunk in to the regulatory lag more in the 2012 period. And Tony is trying to get the information for your other question.

Anthony Kamerick

Ali, this is Tony. Generally in 2010, we're looking at returns on equity excluding special items. This is across the three utilities of about 7.8%. And that compares with 2009 of 6.2%. Those are just book rates of return.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And compared to authorized somewhere in that nine sort of percent range?

Anthony Kamerick

That's correct.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And my final question, previously you've talked about the fact that you're comfortable with a dividend payout ratio somewhere in that 70% or so range or maybe 65%, 70%. I’m assuming that is still the case and based on your prior sort of projections, the sense was you may reach that level in the '14, '15 time frame and revisit the dividend. I'm just wondering given new set of numbers, et cetera, anything that has changed on that front.

Joseph Rigby

Ali, this is Joe. The answer is no.

Operator

And your next question comes from the line of Neil Kalton from Wells Fargo Securities.

Neil Kalton - Wells Fargo Securities, LLC

I don't this has been addressed, and it sounds like I might have to wait till the analyst day anyway, but you've previously talked about equity needs potentially in 2012 and it sounds like the cash flow's not going to be -- the outlook's not that different given the tax benefits and the delay, but I just kind of wonder, as you sort of look at all the moving pieces and sort of incremental cash over a five-year time horizon, has your thought on equity needs in that '12 time frame changed at all.

Anthony Kamerick

Neil, this is Tony. Right now, I don't see us changing what we've told the world that we will not do anything prior to 2012 and at the analyst conference, we will be a little clearer with our intentions but right now, I don't see us changing much.

Operator

[Operator Instructions] Next question comes from the line of Jay Dobson from Wunderlich Securities.

James Dobson - Wunderlich Securities Inc.

Joe, question for you, following up a bit on a couple of the questions that have been asked already. When we think of regulatory lag, certainly your story and your stock has benefited from your efforts to reduce that and as Tony indicated earlier, certainly the cases sort of prosecuted in '11 will benefit that in ’12. But as you see the events unfolding in Maryland and reliability standards and the like, I'm wondering almost if maybe '11 starts to go backwards a little bit as a result of some higher O&M and sort of required spending that then sort of lengthen the amount of time it takes for us to fully reduce that regulatory lag in maybe '12 and '13 and maybe just get your thoughts on that, I'm sure it's an issue you'll be addressing at the analyst conference.

Joseph Rigby

Jay, this is Joe. You are correct. We'll be able to give you I think more perspective. I think the way that I look at this is that it would be premature to conclude some certain outcomes. I think that the proceeding, particularly in the state of Maryland around reliability standards as well as the focus on our storm performance, I think we need to let that play out a little bit. But I would also comment that whether it's the reliability enhancement plan, the totality of our CapEx is all important necessary investment for our customers. And we would intend to have that dialogue with our regulators and I would anticipate that for a company that's going to have this level of spend, that I would like to think that these will all be things that we'll be able to get full recovery and further that there's an understanding that this level of spend is actually augmented by being able to chunk in to the regulatory lag. So I just think that the -- obviously, there's been quite a bit of attention paid on this as we are also and I think we just need to let this process play out a little bit further, but it doesn't cause us to think differently about the basics of our plan or even the estimates that we've provided up to this point.

James Dobson - Wunderlich Securities Inc.

Maybe asking the question a little differently then. Operating and maintenance costs for '11, if we were to exclude or create a base number that excluded both the storm impacts for '10 and sort of just temporarily in our mind, excluded the storm impacts from January, would we look at numbers in '11 or would you be wanting us to think about numbers that would be flat, up a little, up a decent amount, because certainly that's sort of the number I'm keying in on and although I appreciate your comment on CapEx, it seems to me that you're going to have to be spending sort of dollars on sort of human beings and muscle power to resolve some of these what I'd agree with you, are perhaps perceptional issues.

Joseph Rigby

I look at them much beyond perceptional issues. This is very, very serious to us and everything that we have framed our plan around is to improve the customer service and that's obviously critically important to us. I don't have numbers right in front of me, Jay, I think what we've tried to indicate is as we think about the business and we'll be able to split this out a little bit better in April. But as we think about the business, we've contemplated higher level of tree trimming than what we've experienced in the past. I anticipate that we're going to be moving ahead to spend more O&M as it relates to our costs and our personnel. But we'll be able to fill in more of that blank I think in about two months.

James Dobson - Wunderlich Securities Inc.

Tony, just a quick question. And there's probably a very easy answer for this, Pages 14 versus Pages 17, you indicate that normal weather was either $0.7 benefit in '10 or $0.03 benefit in '10 and I'm just trying to figure out which is the right answer?

Anthony Kamerick

Jay, the $0.07 is year-over-year '10 versus '09. The $0.03 is '10 versus what we would consider typical or normal.

James Dobson - Wunderlich Securities Inc.

When on 14 it says versus normal, it's not really versus normal, it's versus '10. Whereas in -- it’s really the $0.03 is what -- if we assume normal weather we ought to back out $0.03 from 2010?

Anthony Kamerick

That's correct.

Operator

Your next question comes from the line of Dan Jenkins from State of Wisconsin Investment Board.

Dan Jenkins - State of Wisconsin Investment Board

I was curious given your projected CapEx for 2011 and in your comments on the bonus depreciation, what your debt requirements might be for 2011.

Anthony Kamerick

We have some plans in 2011 -- this is Tony. And we'll probably be issuing some debt at the operating company level in 2011.

Dan Jenkins - State of Wisconsin Investment Board

Do you have an amount?

Anthony Kamerick

Probably somewhere, right now this is preliminary thinking, $150 million to $200 million at Atlantic City and maybe another one at Pepco.

Operator

And you have a follow-up question from the line of Paul Ridzon from KeyBanc Capital Markets.

Paul Ridzon - KeyBanc Capital Markets Inc.

Tony, when you gave that 7.8% blended ROE, was that weather normed or was that including the benefit of the strong whether?

Anthony Kamerick

That’s just plain old book return on equity. Right off the financial statements.

Paul Ridzon - KeyBanc Capital Markets Inc.

So actual's probably a little below that, given the weather held?

Anthony Kamerick

Yes, that's conceivable. Yes.

Operator

Ladies and gentlemen, that concludes today's question-and-answer portion. I would now like to turn the call back to Mr. Rigby for closing remarks.

Joseph Rigby

Thanks, operator. This is Joe. Again, thank you for joining us today and for your interest in PHI. We look forward to seeing many of you here in Washington in April and have a great day. Take care.

Operator

Ladies and gentlemen, that concludes today's presentation. Thank you for your participation, you may now disconnect. Have a great day.

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