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Executives

Donna J. Kinzel - Vice President of Investor Relations

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

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

Analysts

Paul Patterson - Glenrock Associates LLC

Dan Eggers - Crédit Suisse AG, Research Division

Ashar Khan

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

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

Pepco Holdings (POM) Q4 2011 Earnings Call February 24, 2012 11:00 AM ET

Operator

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

Donna J. Kinzel

Thank you Keith, and good morning, everyone ladies and gentlemen. Welcome to Pepco Holdings Fourth 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 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 M. Rigby

Thanks, Donna and good morning, ladies and gentlemen. Thank you for joining us today. Before I address earnings, I'd like to comment on the 8-K we filed with the SEC late yesterday, announcing that Tony Kamerick has informed us that he will be retiring in January 2013. After 42 years of service to our company, I'm very happy for Tony and his wife Karen, and I'm confident that the succession plan we have in place will ensure an orderly transition. When a successor CFO is named, Tony will be promoted to Executive Vice President and Chief Regulatory Officer for PHI. He will continue to report to me and lead our regulatory process through the current cycle of rate cases. I expect the successor CFO will be named over the next month or 2. So let me simply say that Tony has been an outstanding CFO and has been instrumental in shaping our business strategy. Under his leadership PHI has become a stronger company, financially. Over the years, I have relied on Tony's wise counsel and his continued leadership of the regulatory process until his retirement will be invaluable. And with that, let me turn to our financial results.

2011 was a year of significant progress on our key initiatives. While there is still more work to be done, we are pleased that our investments to improve system reliability and customer service are producing tangible results. While our earnings were impacted by our increased spending on systems maintenance and tree trimming, this spending is having a positive effect on reliability and restoration performance. Throughout the year, our Power Delivery business invested nearly $900 million in transmission and distribution infrastructure, including projects focused on improving reliability and installing advanced technology. Investment such as these are important components of our strategy to provide enhanced value to our customers and investors. As seen on Slide 3, GAAP earnings from continuing operations for 2011 were $1.15 per share compared to $0.62 per share in 2010. Excluding special items in 2010, earnings would have been $1.24. Our 2011 earnings include $0.08 per share for mark-to-market losses resulting from economic hedging activities associated with the Retail Energy Supply business of Pepco Energy Services and lower earnings of $0.02 per share associated with the tax law changes in the District of Columbia. The effects of these items was excluded from the 2011 earnings guidance range. Excluding these items, our 2011 earnings from continuing operations would have been $1.25 per share compared to the 2011 guidance range of $1.15 to $1.25 per share. The increase in adjusted earnings per share from continuing operations for 2011 as compared to 2010 was primarily the result of higher transmission and distribution revenue due to higher rates driven from increased investment. Lower interest expense also contributed to the increase in adjusted earnings. Partially offsetting the earnings increases were higher Power Delivery operation and maintenance expense and the favorable income of income tax adjustments in the 2010 period. Later on the call, Tony will address financial results and our operating segment performance in more detail. But first I'll address some topics of interest.

Improving system reliability was a top priority for our company in 2010 to 2011, and will remain so in 2012. As shown on Slide 4, we continue to make good progress in advancing infrastructure improvements and performing system maintenance focused primarily in the Pepco region that are beginning to reduce power outage -- outages and improve service to our customers. Since launching our Reliability Enhancement Plan in the fall of 2010 for Pepco, we have trimmed trees along nearly 3,500 miles of power lines, replaced our upgraded more than 340 miles of aging underground cable, and added 125 automated switches that will reroute power more effectively during outages. Our efforts to improve reliability are yielding meaningful results. Customer served by the upgraded power lines experienced a 39% reduction in the average number of power outages during 2011 as compared to 2010. When outages did occur, they did not last as long, with the average outage duration declining by 56%. Our reliability enhancement's efforts now extends across the service territories in all 3 of our utilities with the required capital expenditures reflected in our current 5-year forecast.

In addition, to our efforts to improve system reliability, we have made enhancements to our emergency restoration process that are designed to improve customer communications during major storms, such as increasing cost in our staff and phone system capability, conducting more frequent customer outreach and expanding the use of mobile applications for outage information and reporting. These efforts were tested this past summer with the arrival of Hurricane Irene. Nearly 0.5 million 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 Pepco service territory. 98% of customers were restored in a little over 2 days after the storm ceased. After restoration was completed, a survey showed that the majority of responding customers gave our utilities good marks on the handling of storm preparedness, restoration and communications. In a separate survey conducted later in the fall, Pepco's customer satisfaction scores rose a significant 10 percentage points compared to a similar survey conducted 2 months prior to Hurricane Irene. As we are making progress in improving reliability and speeding restoration, we are continuing to dialogue with our regulators regarding system reliability and standards. In Maryland, as seen on Slide 5, the rule making to establish reliability standards applicable to all electric utilities in the state continues to move forward. The proceeding involves all Maryland electric utilities, the Commission's staff, People's Council, and other interested parties. Following the working group process and rule making hearings, the commission approved draft rules establishing requirements for service interruptions, downed wire response, customer communications, vegetation management, and information -- equipment inspection, among other activities. The comment period on the draft standards has not yet begun but we believe it is unlikely that the Maryland Commission will make any material changes to draft standards. According to legislation passed by the Maryland General Assembly, regulations must be adopted by July 1, 2012. We were active participants in this stakeholder working group that proposed regulations to the Commission and generally support the draft rules as issued by the Commission. Our goal is to promote reliability standards that are objective and fair, and in turn, we support a regulatory process that provides the company with a reasonable opportunity to obtain timely recovery of the investments necessary to meet these standards. Turning to Slide 6 in the District of Columbia, the Commission adopted new reliability standards in July and further technical revisions were adopted earlier this month to address certain issues raised in Pepco's application for reconsideration. The new standards require improvement in reliability performance on an annual basis beginning in 2013 and continuing through 2020. We believe these standards are achievable in the short term but continue to believe the standards may not be realistically achievable at an acceptable cost over the longer term. The standards permit Pepco to petition the Commission to reevaluate the reliability standards for the 2016 to 2020 period to address feasibility and cost issues. In 2011, we continue to make great strides in implementing our blueprint for the future. The status by Jurisdiction can be seen on Slide 7. Meter installation and activation is essentially complete for Delaware electric customers. For Pepco customers in the District of Columbia, meter installation is nearly complete and activation is well underway. For Pepco's customers in Maryland, meter installation has begun and we expect activation to begin in the second quarter. The initial customer benefits include the availability of more detailed account specific information on energy usage, fewer estimated bills, enhanced billing options, as well as an outage detection capability that helps make the restoration process more efficient. As approved by the respective Commissions, regulatory assets have been created to assure recovery of and the return on, AMI-related cost between rate cases.

In December, Delaware approved the implementation of the Critical Peak Rebate form of dynamic pricing for all default service customers, with implementation for residential customers phased in over 2 years beginning this year. Under the Critical Peak Rebate structure, customers are rewarded for lowering their energy use during critical peak periods, when energy demand and the cost of supply and electricity are higher. The Critical Peak Rebate structure has been approved in concept in Maryland and the tariff details are currently being developed by working group. In the District of Columbia, our proposal to implement dynamic pricing is pending, subject to approval of phase in implementation of Pepco's residential customers in Maryland and the District of Columbia is targeted to begin this year and continue into 2013. We remain on the leading edge of the smart grid endeavor and just last month, joined with the White House to launch The National Green Button initiative. This initiative will make energy usage data available to customers for download in a standardized format, allowing them to take advantage of new applications that help them understand their energy usage and improve the efficiency of their electric consumption. Through the expansion of the smart grid and implementation of dynamic pricing, we will gain added tools to improve system reliability while enabling customers to better manage their energy use and lower their energy bills.

Now turning to sales. We know our customers are focused on energy efficiency and conservation, especially in light of the weak economy. While our customer count was essentially flat in 2011 as compared to 2010, weather adjusted kilowatt hour sales were down about 0.5%. A portion of the impact of the lower sales was offset by the revenue decoupling mechanisms we have in place, demonstrating the effectiveness of this rate design. With decoupling in place in Maryland and the District of Columbia, approximately 2/3 of the distribution revenue was decoupled from consumption. As I mentioned earlier, we invested nearly $900 million of capital in the Power Delivery business in 2011. As shown on Slide 8, over the next 5 years we expect to spend $5.6 billion on electric transmission, distribution, gas delivery and our blueprint for the future initiatives. These investments are aimed at improving reliability and enhancing customer service, meeting load demand and implementing Advanced Metering Infrastructure. As we have previously reported, PJM provided us notice in August that the scheduled in service date for the Mid-Atlantic Power Pathway, or MAPP project, has been delayed from 2015 to the 2019 to 2021 time period. This delay takes into account changes in demand response, generation retirements and additions, as well as the 2011 long term load forecast for the PJM region that is lower than forecast used in previous PJM studies. In January, PJM release the 2012 long-term load forecast, which shows an overall reduction in the projected load levels in the eastern part of PJM. The impact of the 2012 load forecast on MAPP in service date will not be known until PJM completes its 2012 Regional Transmission Expansion Plan review process later this year. Given the delay in the in-service date, we have suspended most permitting, engineering and environmental studies. However, we plan to complete right-of-way and land acquisitions in Dorchester County, Maryland and some permitting and environmental activities at an estimated cost of approximately $5 million for 2012. Our 5 year capital plan assumes a 2020 in-service date and $2,000 -- $205 million in capital expenditures for the MAPP project. In addition, to the MAPP project, we expect to spend $1.4 billion on transmission infrastructure over the 5-year time period. Our transmission assets are subject to FERC jurisdiction and the transmission rates are set under a formula rate process. These assets earned returns on equity of either 11.3% or 12.8%. Given our plans to continue extensive investments in our distribution infrastructure, it is critically important to ensure timely cost recovery and the opportunity to earn reasonable rates of return. In 2011, we filed distribution rate cases in each of the 5 electric jurisdictions we serve in an effort to keep the rate of recovery in line with the rate of investment. Slides 9 through 13 provide details of the pending cases. In total, the cases request an annual rate increase of $227 million based on returns of equity of 10.75%. Each filing also includes a comprehensive discussion on regulatory lag and its negative effects as well as a proposal for adopting 2 mechanisms to reduce regulatory lag. The first is a reliability investment recovery mechanism for an Infrastructure Investment Program, in the case of New Jersey, which provides full and timely recovery of future capital investments related to distribution system reliability. We have also proposed the use of fully forecasted test years for future rate cases. We expect resolution of the cases in the second and third quarters of this year. As I have noted, reducing regulatory lag is a significant focus. Our preference is to achieve this by adopting mechanisms that mitigate the need for frequent rate cases, which we feel is costly and inefficient. However, we have a deep and experienced regulatory staff that can execute a regulatory strategy that includes frequent rate cases, if need be, in order to earn returns at or close to what the Commissions have authorized. At Pepco Energy Services we are making good progress in growing the Energy Services business. As seen on Slide 14, Pepco Energy Services signed $129 million of new energy efficiency contracts in 2011, including large contracts with the Maryland Port Administration, the Virginia Department of Military Affairs and the Bureau of Engraving and Printing. 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. As for the Retail Energy Supply business, the wind down of this business continues to be on track with substantially all of Pepco Energy Services retail customer obligations being performed by June 2014. Also on track is the planned deactivation of Pepco Energy Service's 2 oil fire generating facilities in Washington, D.C. that are scheduled to be deactivated in May of this year. And at this point, let me turn it to Tony Kamerick.

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 for 2012, including our earnings guidance range. We will then open the call to your questions. Slide 15 summarizes our earnings for the full year and fourth quarter of 2011. GAAP earnings from continuing operations for the full year 2011 were $260 million or $1.15 per share, compared to $139 million or $0.62 per share for the full year 2010. Excluding special items and the guidance related to adjustments that Joe referred to earlier, and have identified in our earnings release and slides, earnings from continuing operations for 2011 would have been $283 million or $1.25 per share compared to $277 million or $1.24 per share in 2010. In the fourth quarter of 2011, GAAP earnings from continuing operations were $23 million or $0.10 per share compared to $14 million or $0.06 per share for the fourth quarter of 2011. Excluding the special items and guidance related adjustments, earnings from continuing operations for the 2011 quarter would have been $34 million or $0.15 per share compared to $56 million or $0.25 per share. The summary of the drivers of our financial results can be found on Slide 16 and 17. Power Delivery earnings were $0.93 per share for the full-year 2011 compared to $1.03 per share in 2010, excluding special items. By far, the biggest driver of the reduction in earnings year-over-year, was higher operation and maintenance spending, which decreased earnings by $0.25 per share. The increase in O&M was largely due to higher reliability and preventive maintenance costs as well as the impact of storms, which accounted for $0.04 per share of the increase. During the third quarter earnings call, we provided a forecast of 2011 Power Delivery O&M expense of $897 million. Actual Power Delivery O&M expense for the year was $884 million. Lower weather related sales versus the prior year decreased earnings by $0.02 per share, heating degree days were lower by 6% and cooling degree days were lower by 9% in 2011 as compared to 2010. 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. The earnings decreases were partially offset by higher distribution revenue in 2011, which increased earnings by $0.10 per share and higher transmission revenue, which increased earnings by $0.07 per share. A higher revenue was due to higher rates in effect, driven by increased investment in the utility infrastructure.

For the fourth quarter of 2011, Power Delivery earnings were $0.11 per share compared to $0.24 per share for the fourth quarter of 2010, excluding special items. The lower earnings in the 2011 quarter were primarily the result of a favorable impact of an income tax adjustment -- income tax settlement and income tax adjustments in the 2010 quarter. Pepco Energy Services earnings were $0.18 per share for the full-year 2011, excluding mark-to-market losses compared to $0.16 per share in 2010. The increase in earnings was due to lower interest expense and higher energy services revenue, partially offset by lower retail electricity sales volumes resulting from the ongoing wind down of the Retail Energy Supply business.

Pepco Energy Services earnings were $0.04 per share for the fourth quarter of 2011, excluding mark-to-market losses compared to $0.03 per share in the fourth quarter of 2010. The increase in earnings of $0.01 per share was due to an income tax adjustment. In our other nonregulated segment, earnings were $0.18 per share for the full-year 2011, excluding the impact of a tax law change in the District of Columbia, compared to $0.11 per share for the full-year 2010. The earnings improvement was primarily due to income tax adjustments including the benefit resulting from the settlement with the IRS for prior tax years, which occurred in the second quarter of 2011. Earnings quarter-over-quarter were unchanged at $0.02 per share. In our Corporate and other segment, which is primarily unallocated corporate costs, earnings improved by $0.02 per share, excluding special items for both the full year and quarter periods.

Our results show Conectiv Energy's results as discontinued operations. For the full-year 2011, Pepco Holdings incurred an after-tax loss of $3 million from discontinued operations. This loss reflects the liquidation of substantially all of Conectiv Energy's remaining assets and businesses. No material gain or loss is expected to be recognized from the liquidation of the few remaining assets and liabilities held in Conectiv Energy.

Now I'll turn to some topics of interest for 2012. In the second quarter of 2011, PHI implemented a modified pension investment policy to reduce the effects of future volatility of the fair value of the pension assets relative to the pension liabilities. Under this new liability driven investment strategy, the plan's allocation to fixed income investments was increased, with the reduction in the allocation to equity investments. This change in investment strategy is designed to decrease contribution and expense volatility by generating investment returns to provide adequate funding to meet all current and future benefit obligations of the plan when combined with PHI's contributions.

For 2012, we estimate that pension and other post-retirement benefit costs to be approximately $103 million across PHI as compared to $94 million in 2011. Historically, about 70% of this amount is reflected in our operating expenses, with the balance charged to capital. As seen on Slide 18, we estimated the pension and other post-retirement benefits expense will be approximately $72 million in 2012, as compared to $66 million and 2011. Additionally, although we project there will be no minimum funding requirement in 2012 under the Pension Protection Act, on January 31, 2012, the utilities made discretionary tax deductible contributions totaling $200 million in accordance with our policy to bring the plan assets to at least the funding target level for 2012 under the Pension Protection Act. We made a $110 million contribution to the pension plan in 2011.

Slide 19 shows the current status of the cross-border energy leases. The book value of the lease investment portfolio as of December 31, 2011, was $1.3 billion. The current annual tax benefits from the cross-border energy lease investments were approximately $51 million and the annual net earnings are approximately $21 million. As with the current status of our dispute with the IRS regarding the tax benefits of the leases, in 2011, PHI paid $74 million of tax associated with the disallowed deductions from the lease investments in connection with the audit of the 2001 and 2002 tax years, plus penalties of $1 million and subsequent interest of $28 million. Last July, we filed a claim for refund of the disallowed deductions. Since our claim for refund was not approved by the IRS within the statutory 6-month period, last month we filed complaints in the U.S. Court of Federal Claims seeking recovery of the tax payment, interest and penalties. This litigation against the IRS may take several years to resolve.

Slides 20 and 21 show our earnings guidance for 2012 and the expected major earnings drivers. Our 2012 earnings guidance range for ongoing operations is $1.15 to $1.30 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 associated with the Retail Energy Supply business of Pepco Energy Services. Looking at our guidance range for 2012 versus our adjusted results for 2011, significant drivers that are expected to have a positive impact on earnings include constructive outcomes of our 5 pending base rate cases and lower planned operation and maintenance expense. The lower O&M expense is partly due to the storm activity in 2011, which drove $0.04 per share of incremental storm costs. Factors that are expected to have a negative impact on earnings in 2012, as compared to 2011, include lower earnings of Pepco Energy Services due to the continued wind down of the Retail Energy Supply business and higher Power Delivery depreciation expense. Also keep in mind that we benefited from $0.08 per share of net tax adjustments in 2011 as well as $0.06 per share of adjustments to our standard offer service margin. Our guidance range assumes normal weather. Higher cooling degree days as compared to normal contributed $0.01 per share to earnings in 2011. Now let me turn it back to Joe Rigby for some closing remarks.

Joseph M. Rigby

Thanks, Tony. As I said earlier in 2011, we made great progress on executing our strategic plan and we will maintain that momentum into 2012 and beyond. The year was not without challenges but we managed through them well and we remain focused on our top priority to improve reliability of our electric system. Our stable earnings base, low risk profile, commitment to the dividend and our earnings growth opportunities driven by infrastructure investment and regulatory lag reduction provide a strong foundation for enhancing value for our investors. Our annual Analyst Conference is scheduled for March 26 and 27, 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're happy to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

On Slide 21, I wasn't completely -- when I look at it, it says the annualization of 2011 rate increases, but I don't see any actual -- in this waterfall chart, I don't see anything for the 2012?

Anthony J. Kamerick

Well there's a good reason for that. It's not there. We don't have the results of those rate cases and what we built into guidance is a consensus among our leading experts here at the company around that, those outcomes. Generally, assuming reasonable results.

Paul Patterson - Glenrock Associates LLC

Okay, so it's somewhere in here?

Anthony J. Kamerick

Yes, it's in there. If you look at the far right, you'll see the striped box there.

Paul Patterson - Glenrock Associates LLC

I got you. Okay. Missed it. Okay. And then with respect to the PES, I mean when does this wind down, finally wind down, and when is it over?

Joseph M. Rigby

Okay, John Huffman can handle that.

John U. Huffman

Yes. This is John Huffman. Well, we have contracts that run out through 2014. But really, the vast majority of the volume of the business will be completed by the end of this year.

Paul Patterson - Glenrock Associates LLC

Shouldn't this be seen as a discontinued operation or I mean, I'm just sort of wondering from an accounting perspective, is seems like this is sort of a drag and not an insignificant one. I'm just sort of wondering how that might be viewed, do you see what I'm saying?

Anthony J. Kamerick

Paul, this is Tony. Generally speaking, if you have a 12-month time frame for exiting a business, then it moves into discontinued operations but something like what PES is going through over the course of several years is not considered as discontinued operations until we get a little closer to the end point.

Paul Patterson - Glenrock Associates LLC

Okay and these contracts, I guess, are just losing money, is that it? There's no way of sort of marking it to marketing? And having it...

Anthony J. Kamerick

Paul, we're not losing money on them. They're just -- they're falling away so we're not getting as much margin.

Paul Patterson - Glenrock Associates LLC

And therefore the fixed cost is still there?

John U. Huffman

Yes, this is John Huffman. No, the business -- that retail business continues to be profitable, even factoring in the G&A expenses required to support that business. What you're seeing here on this slide is the reduced -- the basically lower...

Paul Patterson - Glenrock Associates LLC

I got you, the lower earnings. Right.

John U. Huffman

Yes, exactly. The business is shrinking. So that's all what you're seeing here, but it remains profitable.

Paul Patterson - Glenrock Associates LLC

Now the other part of the business is doing better year-over-year, right?

John U. Huffman

Yes. If you look at our results, compared in 2011, compared to 2010, we are seeing growth in our Energy Services business.

Paul Patterson - Glenrock Associates LLC

So we thought that was -- and that was $0.04. How does that look going forward here?

John U. Huffman

Well, I mean it's -- when you look at the entire $0.09 decrease in the PES earnings for our guidance for 2012 compared to 2011, the Energy Services business is factored into that.

Paul Patterson - Glenrock Associates LLC

Okay, and then in terms of the tax rate. I know you guys have taken up the tax adjustments, but I mean, how should we think about the tax rate going forward here for 2012?

Anthony J. Kamerick

Paul, again, this is Tony. I would think of them as we have portrayed them in the past. I think you can use a normal tax rate for us, but I will remind you that we have several years of federal tax returns that are still uncompleted, in terms of the IRS audits. And so we are going to experience potential adjustments from one year to another. Until the IRS gets more current with their audits.

Paul Patterson - Glenrock Associates LLC

Okay, and then just finally sales growth?

Anthony J. Kamerick

Sales growth, again, this is Tony. We're looking at something between 1.5% and 2% for 2012 and our customer growth rate we're seeing as around 0.7%. Year-over-year.

Paul Patterson - Glenrock Associates LLC

So when you guys mentioned that you guys had a -- on a weather-normalized basis, a decrease in sales growth, that was some sort of an anomaly last year?

Anthony J. Kamerick

Well, it was weather-driven.

Paul Patterson - Glenrock Associates LLC

I thought weather normalized, it was down.

Anthony J. Kamerick

Weather normalized, it probably was down, yes. I'm looking at the numbers right now.

Paul Patterson - Glenrock Associates LLC

So I'm just wondering, I mean like long-term, I guess without getting into -- just sort like without the -- long-term, what are you guys thinking is going to happen here? Because we're seeing another this in other areas as well?

Anthony J. Kamerick

Well, as I said, it looked like in 2011 we had a slight decrease in weather-adjusted sales of 0.5%, but going forward, we're looking at, as I said, between 1.5% and 2% sales growth. And of course, that affects the Delaware service territory and the New Jersey service territory.

Operator

Your next question from the line of Dan Eggers with Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

Just real quick on PES with the Energy Services business, is your expectation still that you're going to get to that kind of $0.14, $0.15 number by 2014 from a contribution perspective?

John U. Huffman

Yes. Dan, this is John Huffman. Yes, we're actually going to cover that at our analyst conference next -- later, I guess, next month. So we'll update that, at that point.

Dan Eggers - Crédit Suisse AG, Research Division

I mean, it seems like the opportunity keeps getting bigger and the backlog additions keep growing, is that kind of consistent as you would have expected or is there kind of federal government policy slowing down some of those opportunities?

John U. Huffman

Yes, I mean we're definitely seeing growth in our overall business volume. We've added some staff over the last few years. We've expanded geographically. So we're definitely making good progress in growing the business. We are seeing some economic headwinds as it relates to the, particularly to the state and local government sectors, and in the DOE contract on the federal side, that really hasn't gained the traction that we thought it would be when we were awarded that a couple of years ago. So there's -- we're growing the business for sure, but we are seeing some economic headwinds.

Dan Eggers - Crédit Suisse AG, Research Division

And I guess either Joe or Tony, can you guys just maybe share a little more color on the conversations you're having or what your guys are observing as you're going through all these rate cases and kind of receptivity to the reliability trackers you're trying to get to put in place?

John U. Huffman

Dan, this is Joe. I'll make a comment and then I'll turn it over to Tony. He was the lead policy witness. I think that the most recent experience we've had is obviously, in the District of Columbia and I think we presented a very strong case. One of the things that came out of that process was some additional information that we were asked to provide to the Commission with regard to a select number of distribution projects. It's -- I don't want to kind of forecast the outcome but I would say that we were very pleased with the level of interest that was expressed. And we're going to know I think in a relatively short period of time. That additional information that was requested has probably pushed the schedule out a couple of weeks, maybe a month. So I guess maybe we were initially thinking April and it may kind of lead into May. But I think, all in all, if we get a good outcome on the RIM, that won't -- that will actually be a good thing for us. So I think we're going to get a lot more color obviously, in Maryland, when we get the -- when we put kind of the same mechanisms in place or in front of the Maryland commission. So I would just say it's long -- it's a long-winded way to say, I think, so far, so good, but obviously more to come. I don't know if Tony -- if you have any...

Anthony J. Kamerick

I don't know that I can add a whole lot. In Maryland, we are getting a lot of discovery questions around the RIM and how it would work and whatnot. But we haven't seen the other party positions on it. So it's a little early to tell. I would say, that we are gearing up, in case it doesn't work this time, to refile later this year.

Dan Eggers - Crédit Suisse AG, Research Division

Okay, so you should be really expecting -- what? In next few weeks, right before the Analyst Day, we should have a reasonable view on what the intervenors are going to be saying in Maryland, having a sense of where this is headed?

Anthony J. Kamerick

I'm not sure where the intervenors file here, let me look that up, Dan. Okay, here it is. It's April 11. The Pepco case. And let's see, Delmarva Maryland, they filed on April 6.

Dan Eggers - Crédit Suisse AG, Research Division

The intervenors are going to file on March, so we'll know at least what their stance is before the Analyst Day, right?

Anthony J. Kamerick

I'm sorry, I gave you the wrong dates, Dan. In Pepco, the intervenors file on the 23rd of March and for Delmarva, they file on the 19th of March. And you are correct. The answer is yes.

Dan Eggers - Crédit Suisse AG, Research Division

So we'll have a conversation about it at the Analyst Day, okay. That was -- but I just want to make sure. On the outlook for 2012, you guys talked about weather normal, given the fact that it's been abnormally mild so far this year, is that going to have -- do you think that has much bearing on expectations right now or are we just low enough demand period, typically that is not going to have an impact?

John U. Huffman

This is Joe, it's too early. We're not concerned about that right at this point.

Dan Eggers - Crédit Suisse AG, Research Division

Okay, I guess, this is the last question, just the thought process on kind of the equity raised this year that you guys have laid out in your plans?

Anthony J. Kamerick

Dan, this is Tony. We haven't changed anything from what we've said in the fall. We do plan to do an offering this year, the timing and amount will depend on market conditions basically, and obviously, there are certain windows during the year that we will focus on and we haven't locked in on anything basically, yet.

Operator

Your next question comes from the line of Ashar Khan with Visium.

Ashar Khan

Can I just go to Slide 21. I'm just trying to get a sense, trying to map up my quarters, can you help us this incremental storm cost of $0.04. Could you just remind us, which quarter this incurred in last year?

Anthony J. Kamerick

I think some of it definitely was incurred in the first quarter. I think the bulk of it was the first quarter but there may have been additional costs in the third quarter.

Ashar Khan

So bulk in the first and some additional in the third quarter. Okay. And then this tax adjustment of $0.08, is that related specifically into any one quarter or no?

Anthony J. Kamerick

This is Tony, again. My recollection is that it came in the second quarter.

Ashar Khan

Okay, so that's all in the second quarter. And then this miscellaneous distribution revenue, can you just amplify what this is?

Anthony J. Kamerick

It's primarily usage.

Ashar Khan

So it's basically higher usage and growth, is that the way to look at that?

Anthony J. Kamerick

Yes, plus the mix between customer usage from one class and another, compared to the prior year.

Ashar Khan

And what is driving that, can I ask?

Anthony J. Kamerick

I would say -- other than just usage, it would be hard to get much beyond that. It's partially weather, partially, I guess conservation and things like that.

Ashar Khan

Okay, and then the way, if I heard it right on the call, the last thing which you said, just going back, is -- what you're assuming is that the revenues from the rate cases in '12, which are all to be decided, are going to be the positive impact, is going to be offset by higher financing costs and the dilution from the equity offering. Is that the way to look at it or am I missing something?

Anthony J. Kamerick

Well I think that's all together, built into that range that we have on that last bar. A lot of different scenarios that we look at when we put our guidance together. And so there's all sorts of positives and negatives that go into that analysis.

Ashar Khan

Okay, but it's not a breakeven analysis right now into the guidance? That's my question.

Anthony J. Kamerick

I mean if you look at it as a net positive.

Ashar Khan

Okay, so it's a net positive. The impact less the dilution and -- can I ask you what is the debt plan for this year?

Anthony J. Kamerick

We have a plan at the moment that would put out a couple of issues, one at Pepco and one at Delmarva, a total of 350 to 450.

Ashar Khan

That's all additional, no refinances?

Anthony J. Kamerick

No, this is all new money.

Ashar Khan

This is new money. So there's no benefit of any refinancing from last year or this year in the system?

Anthony J. Kamerick

No, not that we have here, no.

Operator

Your next question from the line of Ali Agha with SunTrust.

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

Tony, can you tell us what was the actual earned ROE in 2011 and the utility platform and what's embedded in the '12 guidance?

Anthony J. Kamerick

We have calculated that the overall return for '11 was around 7%.

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

That's at the utility levels.

Anthony J. Kamerick

Yes.

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

And what are you assuming in your growth guidance?

Anthony J. Kamerick

We're not assuming anything there, Ali. We put the guidance together by -- as I said earlier, an assessment of reasonable outcomes of our regulatory process. So we don't really do it that way exactly.

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

Okay. I guess another way to ask the question is, so if you turn that 7% into regulatory lag from an earnings perspective, how much would that come out in '11 and how much would you expect would eat in given your rate case activity in '12 roughly?

Anthony J. Kamerick

Ali, I guess the best way that I can answer that is to say that in 2011, we used -- for all the rate cases, we used a 2011 test year and the ask is $225 million or $226 million, in total. Now part of that is an increase in the ROE add, but I think some subset of $225 million.

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

Okay, and then also, remind us the CapEx budget for the next 5 years or so. What does that translate into, in terms of rate base? Annualized rate base growth?

Anthony J. Kamerick

Ali, this is Tony. I think we'll be able to produce that kind of data when we do the Analyst Conference. It's not going to diverge too much from the one we showed last year.

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

Okay. And then going back to, Tony, on the discussions you've been having with regulators, obviously, the lag is one focus, but are you getting any indication at all that they may be also amenable to look at authorized ROEs or maybe bring them back up particularly know the sub-10% ROEs, like in D.C. and the jurisdiction that you've seen or do you think that they are adamant -- sticking to what they were authorized last time, even though you asked for higher ROEs?

Anthony J. Kamerick

Again, that's a tough one to answer. Obviously, we've put on what we thought was a very strong case requesting higher ROEs and explaining why they're needed. So I don't know that I've gotten any real body language indications from any of the commissions on that issue quite yet.

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

Okay. Is it fair to say, I mean the cost of capital argument probably won't drive the ROEs up, right? I mean we're still in a pretty low interest rate environment?

Anthony J. Kamerick

That's true, Ali. We did make us a point in every one of our cases of showing the commissions the national data on authorized ROEs and making a point with them that the numbers that they've authorized us are among the lowest. So we made that case pretty strongly.

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

And Tony, to be clear, I want to be clear, the guidance for '12. I think you laid out some parameters for us for the equity offering last time. Can you remind us, are those still the same? What should we sort of assume for 2012 for the equity offering?

Anthony J. Kamerick

We haven't changed our thought process at all, Ali. We have a number of window openings during the course of the year, we're assessing the different options that we have for each of those windows and we're going to be looking at the market and the pricing and whatnot. So there's really nothing I can tell you that's going to pinpoint it any more than that.

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

I think you said, what? 250 to 350, or 250 to 300?

Anthony J. Kamerick

No, it was 250 to 350 is the range that we've guided the street to.

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

And my last question, just an accounting one, did you guys -- maybe I missed it, did you restate your first 9 months numbers as well? When you talk about adjusted numbers, because I thought you at $1.05 through the 9 months, on your adjusted calculation, and $0.15 will get you to $1.20. Did you redo those numbers through the 9 months?

Anthony J. Kamerick

We did not, Ali. We just did the year end that way.

Operator

[Operator Instructions] Your next question is from the line of Jay Dobson of Wunderlich Securities.

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

Going back to Joe, your comments, and I think Tony referred to them, but last year you spent a lot of time because there were so much focus talking about O&M and an aggregate figure and you sort of ended EEI around 897 and Tony pointed out you came in at about 884 for full year. In the context of that 897 you'd been suggesting '12 would be about flat. And I recognize on Page 21, you're saying sort of $0.04 benefits, which sounds like if I'm apples-to-apples, the 897 is going down even more than just the 884, but you probably don't like to keep it in that context, but could you talk within the aggregate and what you're thinking for '12 and then beyond?

John U. Huffman

Well, I think part of the issue of the reduction, if you will, and the EPS impact is simply kind of taking out the level of storm that we would say would fall outside the balance of the normal, as it relates to the prior year. But I think the bigger issue is that, we have crafted an O&M plan that is intended to make sure that, one, we're meeting customer expectations around reliability and customer service. And in looking at that, to make sure that, that also further very much aligned to make sure that we meet all the current and even evolving standards in place, and not just in the Pepco region, but across the entire footprint. And it's very obvious to us that being able to get a constructive regulatory outcome is very much driven from the sense that -- from the point of view of the customer that we're meeting their expectations. So I think one of the issues that had kind of surfaced towards the latter part of last year maybe was even referred to in one of the write-ups that came out, is there kind of a new normal now for us. And I think that the answer to that is, in some ways, yes, that we need to make sure that we're -- whether it's on the capital side or on the O&M side, that we're doing the right kinds of things to make sure that there we're being responsive and aligned with the standards. So I look at that as being integral to us achieving what we want to do on the regulatory front. And that's just the prudent thing for us to do and that's what we're going to do.

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

Right. No, no, no, absolutely and certainly that's an integral part of getting good rate case outcomes, but if you don't want to put a number on it, would it be fair to assume that, again, you're reflecting that $0.04, that 2012 O&M would be a low that 884 figure for '11?

Anthony J. Kamerick

Yes, this is Tony. That's a pretty fair assumption. I realize I could give you an answer that just said: yes, move on.

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

I absolutely appreciate the commentary, Joe. Tony, then back to the tax gains and thanks for sort of carving out that $0.08 for the -- in the 2012 outlook or waterfall from the second quarter. But just for clarity, in that guidance, there's no more of that understanding that it could come and you've a lot of tax matters outstanding with the IRS. There's nothing assumed in here, like that $0.08 or any other, let's call it, my word not yours, fluff, in the EPS guidance.

Anthony J. Kamerick

I would say that obviously, we have different scenarios built into the many cases. I think the basic answer to your question before I go on is, no, there's nothing like that. But there are scenarios where we continue to accrue FIN 48 interest and we have potential adjustments that could come into play. But there's certainly nothing of that size.

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

Got you and...

Anthony J. Kamerick

It could go positive or negative, either way.

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

Oh, sure. Absolutely. Obviously, it's fairly hard for us to get any sort of glimpse into that looking forward until it actually occurs, I just wanted to make sure there wasn't much in there. And then the last question, I guess to both of you Joe and Tony. The $227 million of rate increase request you sort of got out there, how would that compare if we look to the sort of the last round of rate cases? What do we thinking about and I could go back and calculate it and this sort of in the context of doing it right here on the phone. Would that be roughly in line with the last round of rate cases in aggregate amount?

Anthony J. Kamerick

I think this round is a good bit higher.

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

It is a good bit higher.

Anthony J. Kamerick

I can't give you the exponential amount but it is definitely higher. In Maryland, for example, we're asking for Pepco, for something like $68 million. In D.C., we're asking for $40-some million. So I think in each case there's a noticeable increase in the ask.

Operator

And ladies and gentlemen, that was our last question for today.

Joseph M. Rigby

Okay, thanks operator. This is Joe Rigby, I want to thank you all for joining us and for your interest for PHI and we look forward to seeing many of you here in Washington in late March. Have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect. Everyone have a great weekend.

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