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Pepco Holdings (NYSE:POM)

Q3 2011 Earnings Call

November 04, 2011 11:00 am ET

Executives

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

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

Anthony J. 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

Donna J. Kinzel - Vice President of Investor Relations

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

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

Paul Patterson - Glenrock Associates LLC

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Pepco Holdings Earnings Conference Call. My name is Cathy, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, to Ms. Donna Kinzel, Vice President of Investor Relations. Please proceed.

Donna J. Kinzel

Thank you, Cathy, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings Third Quarter 2011 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 our 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, ladies and gentlemen, and thank you for joining us today. Earnings from continuing operations for the third quarter of 2011 were $80 million compared to $21 million for the third quarter of 2010. Excluding special items for the 2010 quarter, earnings would have been $116 million. Our operating results reflect continued progress on executing our strategic plan, including our efforts to improve system reliability and customer service. Our results for both 2011 and 2010 quarters reflect Conectiv Energy's results as discontinued operations. Tony will discuss the financial results on our operating segment performance in more detail but first, I'd like to address some topics of interest.

Improving system reliability remains a top priority for our company. As shown on Slide 3, we continue to make good progress in advancing infrastructure improvements and performance system maintenance focused primarily in the Pepco region that will reduce power outages and improve service for our customers. Since launching of our Reliability Enhancement Plan last fall for Pepco, we have trimmed trees along more than 2,600 miles of power lines, replaced or upgraded more than 230 miles of underground cable, and added more than 125 automated switches that will reroute power more effectively during storms. Our Reliability Enhancement Plan is on track and we are beginning to see positive trends in the operating performance of our electric system as is demonstrated by improved outage frequency and outage duration statistics for Pepco.

In addition to our efforts to improve system reliability, we have made several enhancements to our emergency restoration process that will improve customer communications during major storms, such as increasing our call center staff and phone system capability, conducting more frequent customer outreach and expanding the use of mobile applications for outage information and reporting.

Turning to Slide 4, our reliability improvement efforts were tested with the arrival of Hurricane Irene in late August. The high winds and driving rains caused significant damage to the electric system throughout our service territories. Approximately 445,000 of our customers were without power at the peak of the storm, or about 25% of our electric customers. About half of the outages occurred in the Pepco service territory. 98% of the customers were restored in a little over 2 days after the storm seized. After restoration was complete, a survey showed that customers gave Pepco good marks on its handling of storm preparedness, restoration and communications. Tony will discuss the cost of our restoration efforts and the recovery of those costs later on this call.

As we are making progress in advancing our Reliability Enhancement Plan, we also are continuing to dialogue with our regulators regarding system reliability and standards.

Turning to Slide 5, we are awaiting the decision in the Maryland proceeding initiated in August 2010 to investigate the reliability of Pepco's distribution system. Certain parties to this case have recommended the imposition of a variety of sanctions and various reporting requirements. As I have stated, we are committed to improving the reliability of Pepco's electric service. However, while we cannot predict the outcome of the case, we will oppose the sanctions requested by the other parties, which we believe are not supported by the record.

Also in Maryland, as seen on Slide 6, the rulemaking to establish reliability standards applicable to all electric utilities in the state continues to move forward. The proceeding involves All Maryland electric utilities that Commissioned staff, People's Council and other interested parties. The working group met weekly through October, and the commissioned staff issued a report with proposed draft standards on October 27. The report proposes benchmarks for service interruptions, downed wire response, customer communications, vegetation management and equipment inspection, among other activities. We are in the process of reviewing the proposed standards and we'll file our comments to the commission on November 16. We will have an opportunity to discuss our comments in front of the commission during rulemaking sessions that are scheduled for December 8th and 9th. According to the legislation, passed by the Maryland General Assembly, regulations must be adopted by July 1, 2012. We are participants in the process and support the development of objective, fair standards with reasonable penalties and the timely recovery of the investments necessary to meet these standards. In the District of Columbia, the commission adopted new reliability standards in July. The new rules require improvement in reliability performance on an annual basis beginning in 2013 and continuing through 2020. Again, we support objective fair standards. What we believe the regulations in their current form are flawed because they proposed an inconsistent method to calculate reliability. Furthermore, we currently believe the standards as adopted may not be realistically achievable at an acceptable cost over the longer term. As a result, we filed an application for reconsideration of the regulations with the commission on August 8, which is still pending. Our application requested the commission to convene a working group process that considers fully all the relevant issues and allows the commission to adopt reliability benchmarks that will require a meaningful level of reliability, yet also be reasonably achievable through the use of cost-effective reliability-enhancement measures.

We continue to make progress on our Blueprint for the Future initiatives. The Status by Jurisdiction can be seen on Slide 7. The advanced meter installation and activation for electric customers is largely complete in Delaware. The initial functionality includes remote meter reading, the availability of account, specific energy use of information and outage detection. In the District of Columbia, about 60% of the advanced meters have been installed and our goal is to complete the installations by early next year.

Meter activation is underway and is expected to be completed by mid-2012. In June, we began installing advanced meters for Pepco's customers in Maryland, and we expect to complete installations by the end of 2012. The commissions in Delaware, the District of Columbia and Maryland have approved the establishment of regulatory assets to defer AMI-related costs and the accrual of return at the authorized rates of return on the deferred cost, until such time as the cost and accrued returns can be incorporated in customer rates.

The AMI outage detection functionality proved useful during Hurricane Irene restoration efforts. We were able to ping the AMI meters in Delaware and get data that allowed us to clear outage orders, thereby eliminating the need to dispatch crews to several hundred potential outage locations. Proposals are pending in Delaware and the District of Columbia that request permission to implement dynamic pricing plans for customers. Under the proposed Critical Peak Rebate structure, the plans would reward Standard Offer Service customers for lowering their energy use during critical peak periods when energy demand and the cost of supply and electricity are higher. Decisions on the proposals are expected by year end. This Critical Peak Rebate structure has been approved in concept in Maryland, and the tariff details are currently being developed by a working group. Subject to approval, and phase-in implementation for residential customers in Delaware, the District of Columbia, Pepco's Maryland customers is targeted to begin in 2012 and continuing to 2013.

Turning to our regulatory filings as seen on Slide 8. Atlantic City Electric filed a rate case in New Jersey on August 5th, requesting an annual revenue increase of $59 million based on a return on equity of 10.75%. Of the requested $59 million increase, approximately $5 million relates to an increase in sales and used taxes and, therefore, does not impact earnings. A prehearing conference was held on October 19th and a procedural schedule should be issued shortly.

On October 18, Atlantic City Electric filed a separate request in New Jersey for the approval of a continuance and expansion of the recently completed infrastructure investment program. While helping to stimulate the New Jersey economy, the program reduces regulatory lag by allowing recovery on non-revenue-generating infrastructure investment capital expenditures through a special rate outside of the normal rate recovery mechanism of the base rate filing. Under the proposed expansion of the program, Atlantic City Electric would recover reliability-related capital expenditures of approximately $69 million in 2012, $94 million in 2013 and $81 million in 2014.

As shown on Slide 9, the Phase 2 proceeding of Delmarva Power's electric distribution base rate case in Maryland concluded on October 17. In the Phase 2 proceeding, a working group including Delmarva Power, Commission staff and the People's Council examined the need for, and design of, regulatory lag reduction mechanisms. Although consensus was reached among the parties of the working group, the proceeding did provide an opportunity to further educate the parties on the cause and effects of regulatory lag and to discuss the advantages and disadvantages of various regulatory lag reduction mechanisms. Delmarva Power is preparing to file a rate case in Maryland in December in order to continue its efforts to close the gap between its earned and authorized return. We plan to again request commission approval of regulatory lag reduction mechanisms in this case.

Turning to Pepco's base rate case in the District of Columbia, as seen on Slide 10. The procedural schedule has been set for the case with hearings beginning on January 30 and a decision expected in the second quarter of 2012. The filing seeks approval of an annual rate increase of approximately $42 million based on a 10.75% return on equity. Recall that of the requested $42 million increase, approximately $10 million relates to AMI-related cost. Since we have generally been earning a return on these costs since they were incurred, recovery of the cost through rates has a positive cash flow impact but does not affect earnings. Like Delmarva Power's filing in Maryland, this filing includes a comprehensive discussion on the topic of regulatory lag and its negative effects. The filing request approval of a reliability investment recovery mechanism, which provides full and timely recovery of future capital investments related to distribution system reliability. The filing also requests that the commission adapt fully forecasted test periods.

We remain on track with our preparations to file 3 additional rate cases in December, as shown on Slide 11. As I've noted, Delmarva Power plans to file a case in Maryland, as well as an electric case in Delaware. Pepco also plans to file a case in Maryland. Note that the filing schedule is tentative. In each of our jurisdictions, we plan to include in our rate case a comprehensive discussion on the topic of regulatory lag, as well as proposals to minimize lag.

As I've noted previously, reducing regulatory lag is a significant focus. Our preference is to achieve this by adopting mechanisms that negate need for frequent rate cases, which we view as costly and inefficient. However, we have a deep and experienced regulatory staff that can execute a regulatory strategy that includes frequent cases, if need be, in order to return returns at/or close to what the commissions have authorized.

The status of the Mid-Atlantic Power Pathway, or MAPP project, can be seen on Slide 12. As we have previously reported, PJM provided us notice in August, on August 18, that the scheduled in-service date for the MAPP project has been delayed from 2015 to the 2019 to 2021 timeframe. This delay takes into account changes in demand response, generation retirements and additions, as well as a revised load forecast for the PJM region that is lower than forecast used in previous PJM studies. The exact revised in-service date will be evaluated as part of PJM's 2012 Regional Transmission Expansion Plan review process. Given the delay in the end service date, we have suspended most permitting, engineering and environmental studies. However, with PJM support, we plan to complete right-of-way and land acquisition in Dorchester County and some permitting and environmental activities at an estimated cost of approximately $5 million in each of 2011 and 2012.

Slide 13 shows the forecasted annual capital expenditures for Power Delivery from 2012 through 2016. The forecast assumes a MAPP in-service date of 2020. Total expenditures over the 5-year period are estimated to be $5.6 billion, with 28% of the total expenditures spent on FERC-regulated transmission projects.

At Pepco Energy Services, the profitable wind down of the Retail Energy Supply business is on track and we continue to make good progress in growing the Energy Services business.

As shown on Slide 14, Pepco Energy Services signed $38 million of new energy efficiency contracts in the third quarter of 2011, including an $11 million energy performance contract with the Virginia Department of Military Affairs. This project consists of the installation of a number of energy conservation measures for 22 armories and military facilities. Construction began last month and is projected to be completed in 2013.

Looking ahead to business development efforts. We have undertaken over the past 2 years our show in results, with the prospective project development pipeline of $511 million, up 14% since the beginning of the year. 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.

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

Anthony J. 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. We will then open the call to your questions.

As shown on Slide 15, earnings from continuing operations for the third quarter of 2011 were $80 million, or $0.35 per share, compared to $21 million, or $0.09 per share, for the third quarter of last year. Excluding special items as identified in our earnings release and slides, earnings from continuing operations for the third quarter of 2010 would have been $116 million, or $0.52 per share. For the 9 months ended September 30, 2011, earnings from continuing operations were $237 million, or $1.05 per share, compared to $125 million, or $0.56 per share, for the 2010 period. Excluding special items for the 9 months ended September 30, 2010, earnings from continuing operations would have been $220 million, or $0.99 per share.

Our results show Conectiv Energy's results as discontinued operations. For the 9 months ended September 30, 2011, income from discontinued operations net of taxes was $1 million.

Before I discuss our results by segment, I want to address the cost of restoration in connection with Hurricane Irene, as summarized on Slide 16. As Joe discussed, the impact of Hurricane Irene on our service territories was severe. The total incremental cost of our restoration efforts is currently estimated to be $47 million. In the third quarter of 2011, $24 million of this cost was deferred as a regulatory asset and $6 million of this cost was expensed, resulting in an earnings decrease of $0.02 per share. The balance of the restoration cost was charged to capital. Since a large portion of the cost incurred relate to services provided by third parties, for which we have not yet been billed, costs have been estimated and are subject to change. We believe that all of the restoration costs incurred are recoverable. Recovery of the expenses incurred in excess of the storm restoration expenses currently embedded in base rates will be pursued during the current cycle of distribution rate cases.

A summary of the drivers of our financial results can be found on Slides 17 and 18. For the third quarter of 2011, Power Delivery earnings were $0.29 per share compared to $0.41 per share for the third quarter of 2010 excluding special items. By far, the largest driver of the reduction in earnings quarter-over-quarter was the higher operation and maintenance spending, which decreased earnings by $0.11 per share. The increase in O&M was largely due to higher reliability and preventive maintenance costs, as well as the impact of Hurricane Irene as, I just discussed. Lower weather-related sales versus the prior year decreased quarterly earnings by $0.01 per share. Cooling degree days decreased by 6% quarter-over-quarter. The weather for the quarter versus normal weather increased earnings by $0.02 per share. 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. Year-to-date, Power Delivery earnings were $0.82 per share in 2011 compared to $0.79 per share for the 9-months ended September 2010, excluding special items. Higher distribution and transmission revenue due to higher rates, higher default electricity supply margins and favorable income tax adjustments drove the increase in earnings. The largest offsetting factor was higher operation and maintenance expense, which decreased earnings by $0.22 per share. As in the quarter, reliability and preventive maintenance spending and hurricane restoration costs drove the higher operation and maintenance expense.

At our Analyst Conference in April, we've provided a forecast of 2011 Power Delivery O&M expense of $818 million. During the second quarter earnings call, we revised that estimate to $850 million. We now expect Power Delivery O&M will be approximately $897 million with reliability initiatives, system restoration activities and customer communications driving a significant portion of the increase. However, note that approximately $18 million of this expense will be offset by lower corporate costs. This level of O&M spending is contemplated in our earnings guidance range.

Looking ahead to 2012, we anticipate O&M spending will be in line with our current projections for 2011 excluding major storm costs, which are about $16 million year-to-date. Pepco Energy Services' third quarter earnings were $0.04 per share compared to $0.03 per share for the 2010 quarter. The increase in earnings for the quarter was due to higher Energy Services revenue partially offset by lower retail electricity sales volumes resulting from the ongoing wind down of the Retail Energy Supply business and mark-to market losses on derivative contracts. Year-to-date, earnings were $0.12 per share compared to $0.14 per share for the 9 months ended September 2010. The decrease in earnings due to lower retail electricity sales volume and mark-to-market losses on derivative contracts was partially offset by higher Energy Services revenue and lower credit-related costs. Note that the third quarter includes $3 million of net mark-to-market losses compared to $1 million of net mark-to-market gains for the 2010 quarter. For the 9 months ended September 30, 2011, mark-to-market losses were $7 million as compared to losses of $1 million in the 2010 period.

In our other non-regulated segment, third quarter earnings were $0.02 per share compared to $0.04 per share in the 2010 quarter. The decrease in earnings was largely due to the impact of a tax law change in the District of Columbia, which I will discuss in more detail shortly. Year-to-date earnings were $0.13 per share compared to $0.09 per share for the 2010 period. The increase in earnings was primarily due to a tax benefit resulting from the settlement with the IRS for prior tax years, which occurred in the second quarter of 2011.

In our corporate and other segment, which is mainly unallocated corporate costs, earnings declined by $0.04 per share quarter-over-quarter excluding special items, primarily due to the effect of favorable income tax adjustments in the 2010 quarter. For the year-to-date periods, earnings improved by $0.01 per share in 2011 compared to the prior year excluding special items. The earnings improvement resulted primarily from lower interest expense in the 2011 period. The effect of favorable income tax adjustments in the 2010 period was a partially offsetting factor.

Turning back to tax law change I referenced earlier. On June 14, the Council of the District of Columbia approved the Fiscal Year 2012 Budget Support Act of 2011. The Act includes a unitary tax provision under which all commonly controlled subsidiaries of Pepco holdings will be included in the District of Columbia income tax filing. This new reporting method became law on September 14 and is effective for tax years beginning on or after December 31, 2010. The effects of the tax law change lowered Pepco Holdings earnings by $5 million after-tax in the third quarter of 2011. This impact is comprised of additional state income tax expense of $2 million, which impacts all lines of business. In addition, we recalculated the equity investment and certain cross-border energy leases as a result of modified state tax cash flow assumptions, which resulted in a $3 million after-tax charge.

Turning to our earnings guidance, as seen on Slide 19. They are narrowing our 2011 earnings guidance range to $1.15 to $1.25 per share from $1.10 to $1.25 per share. The guidance range excludes the results of discontinued operation and assumes normal weather conditions for the remainder of the year. The range excludes the net mark-to-market effects of economic hedging activities associated with the Retail Energy Supply business of Pepco Energy Services and also excludes the impact of the tax law change in the District of Columbia that I just discussed.

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

Joseph M. Rigby

Thanks, Tony. Before we open the call to your questions, I'd like to offer my perspective on where we stand.

2011 has been a year of significant challenge and significant progress, but we are not yet satisfied with the status of reliability or the timing of MAPP. We are pleased with our strategy, our progress on the Smart Grid and the improvements we have made in reliability and storm restoration. To be sure, we have spent a considerable amount of O&M and capital, making necessary improvements, which will place us in good stead with our customers and regulators. We've been able to accommodate this level of expenditures and still plan to deliver earnings within our earnings guidance range. Tony mentioned we will continue to spend a comparable level of O&M in 2012 excluding major storms to improve reliability and customer service. We will file rate cases to recover these costs and to earn a return on our rate base growth. We believe every dollar we spend is prudent, and should therefore be recovered. We will continue to aggressively pursue the reduction of regulatory lag, and I am confident we will create value for our customers and investors. And as you think about our future, I want to remind you that we are committed to the dividend, as it is an important component to our value proposition.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Paul Patterson of Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

All right. The O&M situation. The storm -- these deferrals, they've -- they are regulatory mechanisms in place for the deferrals, is that correct? I mean, is there any need for regulatory approval for the deferrals?

Anthony J. Kamerick

There is no need for regulatory deferrals. Paul, this is Tony Kamerick. We deferred the expenses on the basis of what we believe are prior commission precedents and we're going to be in the rate cases this year, so we believe that there was a basis for being probable for recovery.

Paul Patterson - Glenrock Associates LLC

Okay. Second question I have is, with respect to the New Jersey infrastructure program, I'm sorry if I missed this, when do you guys expect that to be approved? And last I recall, at least for public service, it pretty much got approved as it was filed? Is that a reasonable assumption, do you think?

Anthony J. Kamerick

Well, we would -- Paul, again, this is Tony. I would hope so, yes. I don't think we have a schedule for when that would be decided on. We are working on discussing it with the BPU and the BPU staff.

Paul Patterson - Glenrock Associates LLC

Okay. And it's pretty uncontroversial. Does that -- I mean, am I thinking correctly about that?

Anthony J. Kamerick

I think, yes. It's -- there's certainly precedent for it in New Jersey. We don't think there's anything controversial in there at all, no.

Paul Patterson - Glenrock Associates LLC

Now, I know there's not a procedural case on the AC rate case, but is there -- when do you expect rates to be approved? And, again, I apologize if you mentioned it and I just didn't pick up on it.

Anthony J. Kamerick

Well, as you know, Paul, New Jersey doesn't have a specific calendar for resolving rate cases. Our goal is typically to have them completed in 9 to 12 months but there's no guarantee there. Things can get bogged down.

Paul Patterson - Glenrock Associates LLC

Okay. And then turning to DC. I assume that the unitary tax is in the rate case, right? So when that's decided, you should theoretically get recovery back, correct?

Anthony J. Kamerick

Yes. That is correct, Paul.

Paul Patterson - Glenrock Associates LLC

Okay. And then the reliability issue that you guys don't believe will -- which you guys are concerned may not be realistic, what happens if it doesn't change? I mean, should we be considered about that? What could be the outcome for shareholders if there's -- if these guys don't get realistic, I guess, is the way I think about it.

Joseph M. Rigby

Paul, this is Joe. The DC Public Service Commission has laid out, I'll say, kind of a pathway from 2013 to 2020 that would be expected to get us to first quartile performance. What we take exception to is that the very same kind of survey information that's being used, they're not excluding certain weather events that, that survey would then exclude. So we see it real, and that's the reason why we see that, that methodology is flawed. As we look at our performance and we project our -- the impact of our CapEx and our O&M, I think our basic view is that over the near-term horizon, let's say, from 2013 to '15 or '16, we're not necessarily concerned that we can't live into that. Where you get out to the much more difficult increments of kind of moving the ball out to field a little bit towards the end is where we're concerned. But I do think that we have not had a significant level of discussion with the staff and the commission on this. And I believe that as we sit back and look at what we're trying to do and what's reasonable to be achieved, and just as importantly, what's I think a reasonable cause, I remain optimistic that we'll come to a very good and reasonable outcome. We want to improve and we can. But given what's been laid out in front of us, we think when you get to the latter half of the decade, that could be problematic. But I'm not concerned at this point.

Paul Patterson - Glenrock Associates LLC

Okay. And then just on the DC Public Service Commission, I believe there's a nomination that's to be voted on for a list of mill. Do we know where that stands or when the -- has that vote taken place yet?

Joseph M. Rigby

It's, right now -- Paul, this is Joe again. Right now, it's in front of a subcommittee of the council that has oversight responsibility for the Public Service Commission, and they've taken live testimony. And I believe that the process should resolve itself in the early part of December.

Paul Patterson - Glenrock Associates LLC

Okay. And then remind me, with all the rate cases you got going on, when is, would -- is there a potential that you might be involved in this commission and with this rate case that you're currently up?

Joseph M. Rigby

I don't believe so but I can't really comment on it. Tony, if you have --

Anthony J. Kamerick

No. I would -- I think our view is that she would not but --

Paul Patterson - Glenrock Associates LLC

Okay. And I was just wondering, like in other words, would you be acting until she gets nominated at every state or whatever should we call this, can be different. I was just wondering if that is how it kind of works or does it...

Anthony J. Kamerick

No. No, Paul she has to be approved.

Operator

Our next question comes from the line of Daniel Eggers.

Dan Eggers - Crédit Suisse AG, Research Division

Did you -- Yes, I saw that you got in the rate cases pending in the months, expected you guys have been doing more to put some of these forward mechanisms in as part of the conversation point or separate lines in the cases. Can you just talk a little bit about the receptivity you guys have come across so far? And has there been any push back kind of to the idea of giving you guys the ability to earn a better return in the current economic environment?

Anthony J. Kamerick

Dan, this is Tony. I would say that we found the Phase 2 process in the Delmarva case in Maryland to be very helpful in terms of getting deeper into the issue and discussing in some depth all the mechanisms being used around the country. It's hard for me to characterize the body language and all that but I think we made some headway there in Maryland. I did -- we also noted that the gas company has a infrastructure proposal surcharge in Maryland in one of their cases, and it was supported by the gas section of the Maryland staff. So we see that as a positive sign. In DC, I think it's a little early because we're in the early stages of that case. But we remain optimistic at -- of this.

Joseph M. Rigby

Dan, this is Joe. I also think that the experience we had in Jersey is a good template, and I think, as kind of Paul picked up on the earlier question, that I would be optimistic that we'll be able to do the expansion of that program. I think our expectation in the state of Maryland, for example, was in Phase 2 was to, at a minimum, have a good robust dialogue, which I think we did. So while I would have certainly been happy if we had come to a consensus that put into place the mechanism, I wasn't necessarily surprised that we had the outcome we did. But in the alternative, we're going to just file rate cases because these are all prudent expenditures and it's very clear that in terms of what our customers expect, we need to make these investments. So the dialogue will continue. And to the extent that we may not get the mechanisms all in place, we have another alternative that we will pursue.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And then I guess, Joe, just kind of your transmission investment on this MAPP, you dived pretty far out the horizon. Is that forcing you guys to reevalutate how you think about transmission investment you would in service charge or you've given the manic nature of PJM side in process to maybe think that the energy going into these projects isn't worth it because it creates too much uncertainty in your planning in capital allocation decisions?

Joseph M. Rigby

Well, I still believe in MAPP, Dan. And I'm -- maybe I'm a hopeless optimist, but I do believe that as the economy rebounds and things play out on the generation front that -- and even with policy around moving renewables that -- and the desire on the part of the PJM board to move ahead with this project then -- would then kind of take a look at their planning methodology that we've talked about in the past that I would expect would be part of the 2012. I'm still a believer that we can do this, which is part of the reason why we want to kind of fill in the last pieces on the right of way. And interestingly enough, I think we had very good dialogue with -- on the permitting front to get this thing rolling. So we're going to know a lot more by the end of next summer, but we still believe in MAPP. I'm glad that we did what we did in the spring, which was to flex the CapEx plan and anticipate that we may want to move some things up. So we've got -- we still kind of come through this with a very robust spending plan that's -- I think will deliver value to our customers and investors. So I still think MAPP is a part of our future.

Dan Eggers - Crédit Suisse AG, Research Division

Got it. And then, I guess, Tony, just on pension. I know it's got 2 months and who knows where interest rates are going, and that sort of stuff. But can you just remind us what mechanisms you guys have in the different jurisdictions to get taken care of on pension versus what you guys could be exposed to over the next 1 or 2 or 3 years?

Anthony J. Kamerick

Dan, we basically have coverage of our pension in base rates. A couple of the jurisdictions use a 2-year average. But there's no deferral or track or kind of mechanisms in any of our jurisdictions. I would note that, if -- as you read the 10-Q, you'll notice that we've shifted our investment strategy to a more longer term fixed income, a lot of the liability-driven investing strategy. So we don't really see the volatility hitting us quite as hard as it has in the past.

Operator

Our next question comes from the line of Paul Ridzon of KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

This quarter, the decline at PES of supply was offset by a pick-up in services. Have we hit an inflection point where there's not enough supply business left and services is going to keep growing so that should start to be a growing segment, that being PES?

John U. Huffman

Yes. Paul, this is John Huffman. Yes -- no, I think we are seeing the growth in the Energy Services business as we’ve been ramping up the staff in our overall business development efforts over the last couple of years. So we expect to see continued growth in that business.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And of the -- the earnings at PES, can you break it down how much was supply and how much was services?

Joseph M. Rigby

Hang on a sec. Paul, why don't you -- I think you may want to follow up with Donna, and we can get that information for you.

Operator

Our next question comes from the line of Jay Dobson of Wunderlich Securities.

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

I wanted to talk, and I don't know if you got through with this to Tony or to Dave, but O&M, when we look out to '12, I here you're on sort of flat versus the current expectation for '11. But as Tony sort of laid out, I think, very effectively, we bring on an upward revision trajectory for sort of the last 3 data points, which would stand sort of 6 months. So maybe just give us a feel of where we are in that trajectory particularly with a number of reliability proceedings still ongoing. Is this still an upward trajectory? How do we expect -- 1 or 2 more revisions and then a flat maybe and then sort of ultimately a decline? Where are we on that line?

Joseph M. Rigby

Okay, Jay. As much as I'd be tempted to flip over to Tony or to Dave, I'll take a shot at it. I -- you're correct in your observation that we've ramped up. And one of the things that we wanted to do was to try to get as much of this work on as fast as we could because of this -- the direct impact that has ultimately on our regulatory outcomes. So what we're doing particularly, let's say, for example, in the State of Maryland is we're effectively putting a 4-year Tree Trimming cycle into a 2 calendar year period of '11 and '12. And that's why you've seen this kind of ramp-up, for example. Our best view right now is -- and we want to try to be as helpful to all of you as we can. Because we look at 2012 being pretty similar to where we think we're going to end up in '11, I don't -- I wouldn't want to hazard a guess necessarily that it's going to go down. It could, but I think that part of what is all going to play into this is the -- are the evolving reliability standards that we're going to size our spend to make sure that we're meeting those standards. So a long-winded way to say that we don't expect that it's going to go up all that much more than what we're pegging it at now in '12.

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

Fair enough. But as you said, sort of -- if you're choosing the direction, or had to choose a direction, it's a lot more likely to drift a little higher than it is to go lower.

Joseph M. Rigby

I wouldn't expect it to go lower but I'd be hazarding a guess. One of the things we're going to do, Jay, is we'll be able to give a whole lot more color on this when we give you guidance for '12.

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

Okay. Perfect, that's helpful. And then, Tony, on the DC, you mentioned sort of tax provisions. Why exclude that from guidance? Back in the second quarter, we booked a $0.10 gain for some tax issues and I understand you're going to get regulatory approval for recovery of this but why leave it out of guidance?

Anthony J. Kamerick

Well, we're leaving it out of guidance for 2011, Jay, and it's basically due to the fact that this is a tax law change and something that was really not within our realm of control. And we did list changes in tax law when we initiated guidance as one of the items that we would not include in our guidance.

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

Got you. But it will negatively impact reported '11 and reported '12, assuming you're going have to seek recovery of it in the pending cases or soon-to-be filed cases but would not -- you'll unlikely get recovery of it. So probably second half.

Anthony J. Kamerick

Well, I would agree with that, Jay. I would note that of the $0.02, there's sort of a one-time piece associated with the leases, and then there's an ongoing piece. I think, they split out about $3 million for the lease and $2 million for the ongoing part. So -- Jay, I would add that we will include the DC unitary tax in our 2012 guidance.

Operator

Our next question comes from the line of Ali Agha of SunTrust.

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

Joe, just picking up -- Tony, I guess more for you. Also to be clear on looking at numbers on an apples-to-apples basis. If I heard you right, the $0.35 for the quarter includes the tax as well as the mark-to market impact, is that right?

Anthony J. Kamerick

That is correct.

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

So -- but the full year guidance excludes both of them?

Anthony J. Kamerick

Yes, that's correct, Ali.

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

Okay. So just to be clear and I can do the math but --

Anthony J. Kamerick

About $0.05.

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

It's $0.05 negative that's hurt you in the quarter?

Anthony J. Kamerick

Yes. Year-to-date, it's $0.05. For the year it's going to be about $0.05, if the mark-to-market doesn't move that much.

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

That's a combination of the mark-to-market and the tax?

Anthony J. Kamerick

That's correct.

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

Okay. And on annual basis, the tax, looking at the '12 should be what? About $0.05?

Anthony J. Kamerick

You mean for 2011?

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

No, '12.

Anthony J. Kamerick

Oh, for '12. Well, remember that there's 2 components of it and when we recorded the part that's not related to the lease, that is what I would consider sort of the ongoing level of higher tax. It was $2 million after tax for 3 quarters of the year. So I can't really give you the annual number. It's probably in the range of $2.5 million. And so that's kind of the run rate going forward, I think.

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

Got it, got it. I understood. Got it, okay. And then, separately on the CapEx revised numbers again, I don't have the counts to compare them to the previous ones. But from a rate base growth perspective, do they change the rate base growth good for you guys over the next several years?

Anthony J. Kamerick

Not by a whole lot, Ali, no. It's still pretty much in the same neck of the woods. The components may shift a little between T&D but --

Joseph M. Rigby

Yes. I think that it's not as robust, obviously, on the T side given that we took MAPP out and it really doesn't show up until, I think, '16 in this new 5-year plan.

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

Okay, okay. And then thirdly, going back to ready-to-relag issues. If, let's say, the mechanisms, for whatever reason, are not accepted, as you guys are proposing, if you go to an annual filing schedule, does that alone sort of tackle the problem? Or even if you go to the annual filing, which an interim increase with refund, I don't know if you looked at that mechanism which is available in 7 other states, where you clearly got earning or [indiscernible] try to go down that route?

Anthony J. Kamerick

I guess, I would say the annual cases, if we don't get any headway on the other mechanisms, I think they prevent the lag from growing. But it's going to depend on -- okay, if you don't adopt some of these mechanisms, will they be a little more lenient with the forward-looking kinds of adjustments that we would need instead. We're also thinking, Ali, that if we can't cut into it more effectively, we may have to advance our rate cases to every 9 months instead of every 12 months. So we're looking at all possible avenues.

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

I see. And last question, Tony, any updates on your thoughts on equity issuance, timing, size, et cetera?

Anthony J. Kamerick

I can't say that I, my -- we're changing what we've already put out there, Ali. It's still the same. We're looking at a forward. We're also looking at the ATM-type programs, as well as a -- an offering. Timing is not -- we haven't really locked in on the timing yet.

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

And what I recall $250 million or so?

Anthony J. Kamerick

I think we've said $250 million to $350 million, the range.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Mr. Joe Rigby for closing remarks.

Joseph M. Rigby

Thanks, operator, and again thank you all for joining us today and for your interest in PHI. And we certainly look forward to seeing many of the analysts on the call at the upcoming EEI Financial Conference. And with that, have a great day.

Operator

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

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