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Executives

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

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

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

Anthony J. Kamerick - Chief Regulatory Officer and Executive Vice President

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

David M. Velazquez - Executive Vice President of Power Delivery, Chief Executive Officer of Potomac Electric Power Company, Chief Executive Officer of Delmarva Power & Light Company, Chief Executive Officer of Atlantic City Electric Company, President of Potomac Electric Power Company, President of Delmarva Power & Light Company and President of Atlantic City Electric Company

Analysts

Paul Patterson - Glenrock Associates LLC

Greg Gordon - ISI Group Inc., Research Division

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

Andrew Levi

Dan Eggers - Crédit Suisse AG, Research Division

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

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

Charles J. Fishman - Morningstar Inc., Research Division

Pepco Holdings (POM) Q3 2012 Earnings Call November 6, 2012 10:00 AM ET

Operator

A very good day to you, ladies and gentlemen, and welcome to your Q3 2012 Pepco Holdings, Inc. Earnings Conference Call, hosted by Donna Kinzel, Vice President and Treasurer. My name is Chris, and I'll be your conference coordinator for today. [Operator Instructions] At this stage, I would like to turn the call over to Donna Kinzel to start. Please go ahead.

Donna J. Kinzel

Thank you, Chris, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings Third Quarter 2012 Earnings Conference Call. The primary speakers on today’s call are Joe Rigby, Chairman, President and Chief Executive Officer; and Fred Boyle, Senior Vice President and Chief Financial Officer. Also available to answer your questions are Tony Kamerick, Executive Vice President and Chief Regulatory Officer; Dave Velazquez, Executive Vice President, Power Delivery; and John Huffman, President and Chief Executive Officer of Pepco Energy Services.

On today's call, we will be referring to slides, which are available on the Investor Relations section of our website. Before Joe begins, let me remind you that some of the comments made during today’s conference call may be considered forward-looking statements. As such, they should be taken in the context of the risks and uncertainties discussed in the Safe Harbor disclosures contained in our Securities and Exchange Commission filings and found on Slide 2 of our presentation. Also, please note that today’s call will include a discussion of our results excluding certain items that we feel are not representative of the company’s ongoing business operations. These items and the associated financial impact are described in our earnings release dated today. The earnings release can be found on our website at www.pepcoholdings.com/investors. Joe?

Joseph M. Rigby

Thanks, Donna, and good morning, ladies and gentlemen, and thank you for joining us today. As seen on Slide 3, earnings from continuing operations for the third quarter of 2012 were $112 million compared to $80 million for the third quarter of 2011. The 2012 and 2011 earnings include the effects of mark-to-market activity, and the 2012 earnings also include asset impairment charges at Pepco Energy Services. We view these items as not representative of our ongoing business operations. Excluding these items, earnings for the third quarter of 2012 would have been $108 million compared to $83 million for the third quarter of 2011. The increase in adjusted earnings quarter-over-quarter was primarily due to higher electric transmission and distribution revenue resulting from higher rates driven from increased investment, as well as lower expenses due to the establishment of a regulatory asset in 2012 for recovery of storm costs incurred in 2011. Also contributing to the higher earnings is the gain on the early termination of one of our 7 cross-border energy leases. Later in the call, Fred will address the financial results and our operating segment performance in more detail but first, I'll address some topics of interest starting with the recent hurricane.

Last week, our electric system was once again tested with the arrival of Hurricane Sandy. The high winds and driving rain caused severe flooding and tree related damage to the electric system. As shown on Slide 4, approximately 20% of our electric customers were without power at the height of the storm. The majority of the outages and damage occurred in Atlantic City Electric's service territory, where we had peak customer outages of approximately 211,000. Delmarva Power and Pepco experienced peak customer outages of approximately 88,000 and 41,000, respectively. This was expected to be a massive storm, and we took the appropriate steps to prepare for it.

During our restoration efforts, we had more mutual assistance workers assisting us than any previous storm. We had more than 5,800 personnel dedicated to the restoration effort, including more than 2,500 mutual assistance line workers, tree workers and damage assessors. For Pepco and Delmarva Power, 90% of the customers were restored on October 30 and 31, respectively. Given the level of damage in New Jersey, both inland and along the barrier islands, restoration took longer with 90% of Atlantic City Electric's mainland customers restored by November 2 and the remaining customers on the barrier islands, whose homes could accept power, restored on November 3. As we near the completion of the restoration process in each of our regions, the mutual assistance crews that were assisting us, as well as some of our own employees, were released to assist other utilities along the coast in New Jersey and New York.

I would like to take this opportunity to thank our employees, contractors and out-of-state mutual assistance personnel for their outstanding work and sacrifice. I would also like to thank our public officials and community leaders for their words of support during the storm and the restoration process. This support is greatly appreciated by our hardworking crews and employees.

We currently estimate the incremental cost of system restoration will range between $45 million and $65 million, with the majority of the cost being incurred in New Jersey. A portion of the cost will be capitalized. The balance will be expensed or deferred depending on the regulatory jurisdiction. Costs incurred in the most recent storms have been deferred in New Jersey and Maryland and expensed in Delaware and the District of Columbia. Whether expensed or deferred, recovery of the incremental system restoration costs will be pursued during the next cycle of the distribution base rate cases. As I mentioned, a large portion of the costs incurred relate to services provided by third parties and given that restoration was recently completed, we have not yet received invoices for many of these services, therefore, the costs have been estimated.

Now turning to the status of our regulatory activities. On October 23, the New Jersey Board of Public Utilities approved the settlement agreement in Atlantic City Electric's distribution base rate case. A summary of the decision can be found on Slide 5. The settlement provides for an increase in base revenues of $44 million and an authorized return on equity of 9.75%. This increase in base revenue is reduced by a credit to customers of $16 million through an excess depreciation rider, as previously directed by the Board of Public Utilities, resulting in a net increase in revenue of $28 million.

In the third quarter of 2013, the credit of excess depreciation will have expired and the full amount of the revenue increase will be in effect. While this will result in an incremental $16 million in cash, there will be no additional earnings impact as depreciation expense will increase by $16 million upon the expiration of the credit. The new rates became effective on November 1. We believe it was important to get the case concluded, given that it had been pending for 14 months and a BPU decision was most likely months away, and we are currently evaluating the timing of our next base rate case in New Jersey.

On September 26, we received a decision in Pepco's distribution base rate case in the District of Columbia. A summary of the decision can be found on Slide 6. The commission approved a $24 million annual increase in electric distribution base rates based on a 9.5% return on equity. Because a portion of the rate increase relates to the recovery of Advanced Metering Infrastructure costs that were previously deferred as a regulatory asset, the Commission also approved an increase in amortization expense for the AMI regulatory asset of $3.3 million per year for 15 years. The new distribution and amortization rates were effective on October 18. We're disappointed that the Commission rejected our proposals aimed at timely cost recovery, and it will necessitate the more frequent filing of rate cases. We plan to file Pepco's next base rate case in the District of Columbia in the first quarter of next year.

On August 17, Delmarva Power entered into a proposed settlement agreement with the parties to its electric distribution base rate case in Delaware, including the Delaware Commission Staff and the Public Advocate. The settlement in summarized on Slide 7 and provides for a $22 million annual increase in Delmarva Power's electric distribution base rates and a stated return on equity of 9.75%. As permitted by Delaware law, Delmarva Power implemented interim rate increases of $2.5 million on January 31, 2012, and $22.3 million on July 3, 2012. Any excess amount collected will be returned to customers. The proposed settlement agreement also provides for the phased-in recovery in rates of a $40 million AMI regulatory asset. The settlement allows for 100% of the asset to be reflected in rates by June 1, 2014, matched with a 15-year amortization period for the asset.

On October 23, the hearing examiner issued a report recommending approval of the settlement agreement. The settlement agreement is subject to final review and approval by the Public Service Commission, and a decision is expected late this month. Under the settlement agreement in Delaware, the parties agreed to discuss alternative rate making methods including multiyear rate plans. While there is no procedural schedule to these discussions, the company, commission staff and public advocate have been exploring a multiyear rate plan. Our objective in this process is to gain a consensus of the parties regarding the adoption of a multiyear rate plan and to file a proposal with the commission that is supported by all parties. We plan to file Delmarva Power's next electric distribution base rate case in Delaware in the first quarter of next year.

In Maryland, Pepco plans to file its next base rate case later this month, and Delmarva power plans to file its next base rate case in the first quarter of next year. Delmarva Power also plans to file a gas case in Delaware later this month. Slide 8 summarizes the filing schedule for the next cycle of distribution base rate cases across our jurisdictions.

Turning to Slide 9, as I discussed on our last earnings call, the Governor of Maryland issued an Executive Order in July to convene a task force to find ways to improve and strengthen the state's electric distribution system. The Executive Order set in place a process to evaluate the effectiveness and feasibility of undergrounding lines in selective areas, options for other infrastructure investments to improve the resiliency and reliability of the electric distribution system and options for financing and cost recovery of investments. The group, led by the Governor's Energy Adviser, held roundtable discussions in August and September, and we participated in many of these discussions.

On October 3, the governor sent the report issued by the task force to the commission and urged them to quickly implement certain recommendations that would, among other things, accelerate reliability improvement investments in the electric distribution system and allow a surcharge recovery for the accelerated investments. We believe the task force understood the complex nature of the issues involved in making the electric grid more reliable, including the importance of timely cost recovery. We are currently evaluating the report and its recommendations, and we intend to reflect certain recommendations in the upcoming electric distribution base rate cases to be filed in Maryland. We view the task force report as a step in the right direction, and we're encouraged by the construction tone -- the constructive tone of the report.

In the District of Columbia, the Mayor's task force, co-chaired by the city administrator and me, continues to focus on the issue of undergrounding power lines to improve electric system reliability. Meeting of the task force began in August, and a written report is due to the Mayor by January 31, 2013. In collaboration with the other task force participants, we are working to shape actionable solutions to improve the resiliency of the electric grid.

Our projected capital expenditures for the year 2013 through 2017 are shown on Slide 10. Over the next 5 years, we expect to invest $5.9 billion in the Power Delivery business. These investments are aimed at improving reliability, enhancing customer service, meeting load growth and implementing the smart grid. Of the $5.9 billion total, we expect to spend $1.3 billion on transmission infrastructure. Our transmission assets are subject to the jurisdiction of the Federal Energy Regulatory Commission, and the transmission rates are set under a formula rate process.

Turning to Slide 11. While we have seen modest growth in the number of customers, weather normalized kilowatt hour sales were essentially unchanged quarter-over-quarter and decreased about 1% year-to-date. The year-to-date decrease is driven by lower usage by Pepco and Atlantic City Electric residential customers and Pepco commercial customers. Higher industrial sales at Delmarva Power were a partially offsetting factor. A portion of the impact of the lower sales was offset by the revenue decoupling mechanisms we have in place. With the decoupling in place in Maryland and the District of Columbia, approximately 2/3 of the distribution revenue was decoupled from consumption. As we have discussed previously, Pepco Energy Services has been experiencing challenges in the state and local government markets this year. These challenges stemmed from lower energy prices, which lessened the benefit of energy efficiency projects and from the reluctance of the state and local governments to incur debt associated with such projects.

As shown on Slide 12, Pepco Energy Services has signed $7 million of energy efficiency contracts year-to-date, significantly below last year's pace. While we continue to pursue new Energy Services opportunities, given the slowdown in these markets, we are taking steps to reduce costs to align with the lower expected revenue levels. 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. Because of the expected continuation of a challenging Energy Services market and the wind down of the Retail Energy Supply business, we project Pepco Energy Services to contribute after-tax earnings of approximately $5 million in 2013 with future growth from this level being driven by the economic recovery, increasing energy prices and improving financial conditions for state and local governments.

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

Frederick J. Boyle

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

As shown on Slide 13, GAAP earnings from continuing operations for the third quarter of 2012 were $0.49 per share compared to $0.35 per share for the third quarter of 2011. Both periods include the mark-to-market effects of Pepco Energy Services retail energy economic hedging activities. The 2012 period also includes an impairment charge of $1 million after-tax associated with the combustion turbines at Buzzard Point. Excluding these adjustments, earnings per share from continuing operations for the third quarter would have been $0.47 per share compared to $0.36 per share for the third quarter of 2011. GAAP earnings from continuing operations for the 9 months ended September 30, 2012, were $1.06 per share compared to $1.05 per share for the 2011 period. Excluding mark-to-market effects and the impairment charges at Pepco Energy Services, earnings per share from continuing operations for the 9 months ended September 30, 2012, would have been $1.02 per share compared to $1.08 per share for the 2011 period.

A summary of the drivers of our financial results for the quarter and year-to-date periods can be found on Slides 14 and 15. For the third quarter, Power Delivery earnings were $0.40 per share compared to $0.29 per share for the 2011 quarter. Higher distribution and transmission rates increased earnings by $0.04 per share and $0.02 per share respectively. The higher rates were driven by increased investment in the Power Delivery business. Also contributing to the higher earnings was lower operation and maintenance expense, which increased earnings by $0.04 per share. About $0.02 of the lower expense was due to the establishment of a regulatory asset for recovery of storm restoration costs incurred for the January 2011 winter storm that had previously been expensed in 2011.

Year-to-date Power Delivery earnings were $0.84 per share in 2012 compared to $0.82 per share for the 9 months ended September 2011. The increase in earnings was primarily the result of higher distribution and transmission revenue due to higher rates in effect, partially offset by higher operation and maintenance expense, higher depreciation expense and lower weather-related sales versus the prior year.

At our Analyst Conference in March, we provided a forecast of total 2012 O&M expense per Power Delivery of $850 million to $880 million. Given our year-to-date results and expectations for the remainder of the year, we expect O&M to be $890 million to $900 million. This level of O&M spending is contemplated in our earnings guidance range and excludes any Hurricane Sandy O&M costs that are not deferred.

Pepco Energy Services third quarter adjusted earnings were breakeven compared to $0.05 per share for the 2011 quarter. Year-to-date adjusted earnings were $0.06 per share compared to $0.15 per share for the 9 months ended September 2011. The decrease in earnings for both the quarter and year-to-date periods was due to lower Energy Services project activity and lower retail electric sales volumes resulting from the ongoing wind down of the retail energy supply business.

In our other non-regulated segment, earnings were $0.07 per share for the third quarter of 2012 compared to $0.02 per share for the same period in 2011. The increase in earnings was primarily due to the early termination of certain cross-border energy leases, which I will discuss in more detail shortly, as well as the recalculation of the equity value of the cross-border lease portfolio in the 2011 period to reflect the change in the District of Columbia tax loss.

Year-to-date earnings from the other non-regulated segment were $0.14 compared to $0.13 per share for the 9 months ended September 2011. The increase in earnings was primarily due to the factors I just discussed, partially offset by favorable income tax adjustments in the 2011 period. In our corporate and other segment, which is mainly unallocated corporate costs, earnings were unchanged for both the quarter and year-to-date periods.

Now I'll turn to some topics of interest. Returning to the subject of the cross-border energy leases on Slide 16, in September 2012, Pepco Holdings entered into early termination agreements for one of the 7 cross-border lease investments at the request of the lessees. Pepco Holdings received net proceeds of $202 million and recorded an after-tax gain of $9 million upon the termination. We have no intention to early terminate any remaining leases in the portfolio. The book value of the lease investment portfolio as of September 30, 2012, was $1.2 billion. The current annual tax benefits from the remaining cross-border energy lease investments are approximately $43 million and the annual net earnings or approximately $25 million.

As we have previously discussed, on March 5, PHI entered into an equity forward transaction in connection with the public offering of 17.92 million shares of common stock at $19.25 per share. The equity forward transaction must be settled on or before March 5, 2013. Given the unanticipated $202 million in net proceeds received from the cross-border lease termination, we now expect to settle a forward transaction in late February of 2013.

Turning to our earnings guidance. As seen on Slide 17, we are narrowing our 2012 earnings guidance range to $1.15 to $1.25 per share from $1.15 to $1.30 per share. The guidance range 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 the impairment charges at Pepco Energy Services. The range also excludes the cost of system restoration following Hurricane Sandy.

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

Joseph M. Rigby

Thanks, Fred. We continue to make good progress on executing our strategic plan, and we're going to maintain that momentum for the remainder of 2012 and beyond.

This year has not been without challenges, but we continue to manage through them and remain focused on our top priority of electric system reliability and improving the customer experience. Our stable earnings base, low risk profile, commitment to the dividend and our earnings growth opportunities provide a strong foundation for enhancing value to our investors.

Before we take your questions, I want to note that this is Tony Kamerick's last earnings call. We're all really proud to be a colleague of Tony and on a personal note, I very much appreciate all he's done, including being a great CFO for us. We wish only the best for Tony and his wife Karen as they begin the next phase of their lives. And I know Tony would be very anxious to answer most of the questions that you're going to have today, and with that, we're going to open the call to your questions.

Question-and-Answer Session

Operator

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

Paul Patterson - Glenrock Associates LLC

Congratulations again, Tony.

Anthony J. Kamerick

Thank you, Paul.

Paul Patterson - Glenrock Associates LLC

With respect to -- just a few quick ones. On the gain on the lease termination, right below that there's this other net, and I think you might have gone over but I was slightly distracted. The $0.03 positive, is that another tax element? I'm sorry, could you repeat what that was about again?

Frederick J. Boyle

Yes. This is Fred. What that relates to is, in 2011, there was an adjustment made relating to the equity to the cross-border energy lease portfolio that had a $0.03 impact, and so that's just a year-over-year change. It didn't happen in '12. It happened in '11. So that's what the $0.03 relates to. It's not a tax-related adjustment per se. Though the reason for the change at that time was a re-computation of margin associated with the leases driven by the change in the District of Columbia to a unitary tax method.

Paul Patterson - Glenrock Associates LLC

Right. Okay. And then on the cross-border stuff, it looks like this -- you're not planning on anything more happening here, and because of the $202 million, I guess that allows you to defer the settlement of the equity contract, is that how should we think about it?

Frederick J. Boyle

Yes. That's correct.

Paul Patterson - Glenrock Associates LLC

Okay. And with respect to the energy efficiency situation in PES, I mean, I remember that you guys have mentioned there were challenges in the business, but there was a -- you guys had sort of pushed back PES to, I think 2016, to get $0.15. What's the thought process now about its probability, just in general? I mean, just how should we think about this business now? And I mean, you mentioned that the energy efficiency, what's attractive to these state governments, et cetera. Is there anything else we should think about like competition, or just any other color you can give to that?

Joseph M. Rigby

Paul, this is Joe. I'll make a quick comment, and John Huffman is here with us. I think what's happening is that the ESCO business is being pretty severely challenged by the economics around it. Lower energy prices, as we mentioned in our prepared remarks, some of the strain that the federal and state governments are dealing with. This is a business we still believe in. It's a business in which we have built up a good core of internal talent. It's not a drain either from a capital point of view or even from a management interest, but it's going through a tough period right now, and we decided that it would be most helpful to provide a point estimate of earnings expectations. And as we are working through this kind of valley, John is working very, very hard to make further adjustments to the cost structure, so the cost structure lines up to the revenue. Other things that we're doing with regard to kind of pulling in, not so much from a national focus but maybe to try to pulling the focus in a little bit more close to the footprint here. But it's going through a tough time, and there's no kind of dancing around that. And so we just felt that the best way to maybe help you all think about it is to give you a point estimate. Obviously, we're going to talk about this over the future, but it's still a business we believe in, and it's something that we built up, we think a really competency. John, I don't know if you want to add.

John U. Huffman

Yes, this is John. And just to add to what Joe said, yes, the biggest driver and the biggest market segment that we compete in and really the industry competes in is really the state and local government markets. And the economy has had a tremendous impact on their desire to do these types of projects. So we've seen a number of projects being delayed, some being canceled. There's still the same number of competitors involved in the industry, so you have the same number of competitors chasing fewer projects. So again, we're planning on this market to continue into next year, and we've made adjustments to our cost structure to ensure that we remain profitable. And that's our goal as we manage through this downturn is to the extent we need to make additional adjustments, we'll do that. And then as the economy rebounds and the state and local governments pick up, as well as the federal market picking up, then I think you're going to see growth at that point.

Paul Patterson - Glenrock Associates LLC

No, I noticed the slide that you presented there on Slide 12 doesn't -- it says excluding CHP, and I'm just wondering, does this also involve -- would you say the same thing for CHP? Because I mean, again, we hear a lot, and I mean I realize that talk can cheap in government situations, but a lot about CHP in, let's say, New Jersey. I mean is that the same sort of outlook we're thinking about there or is that...

John U. Huffman

It's different. It's a good point. I mean, we did -- we signed the D.C. water contract earlier this year, and we're going to benefit from those margins over the 3-year construction period and 15-year operating period. We are seeing other opportunities out there, and we're going to continue those. So that business is definitely there, and we're looking to grow that as well, but our core business has been the energy efficiency business. So that's really the impact.

Paul Patterson - Glenrock Associates LLC

Okay. I got you. There's just on sales growth in Delaware and Maryland the sort of positive industrial growth, how sustainable do you see that? I mean, I realize that industrial can be sort of volatile. I mean, in other words, should we expect gains like that going forward or just sort of outlook on sales growth here has again been pretty weak outside these 2 things, any thoughts on that?

Joseph M. Rigby

As far as the sales growth within DPL, in particular, the improvement on the industrial side has been quite positive in sort of the 4% to 5% range. But overall, for the year, if I look at it system-wide, we're looking at being down on a weather normalized basis right now projecting about 0.5%. As we look forward, we had been projecting over a 5-year period to be positive between 0.5% and 1%. And we still think we'll be somewhere in that range over the next 5-year period. But right now, in Pepco, in particular, as it relates to the commercial side, that's been lagging, given some of the government uncertainty and change that's happening, the commercial market has lagged here in the Pepco area.

Paul Patterson - Glenrock Associates LLC

Okay. Finally, with respect to the Maryland task force or any other jurisdictions in terms of this accelerated recovery, any key dates we should be looking out for with respect to follow up on you guys getting more timely recovery of your investments or more streamlined approach to getting...

Joseph M. Rigby

Yes. Paul, I think what you want to keep your eye, this is Joe, it's going to be coincidental with the filing dates on the rate cases we outlined.

Operator

Our next question is from the line of Greg Gordon from ISI Group.

Greg Gordon - ISI Group Inc., Research Division

Paul asked a bunch of my questions. I just wanted to know, the $5.9 billion current projection for CapEx, should we expect that to be updated as a function of what you are expecting to do in response to the Maryland grid resiliency task force report?

Joseph M. Rigby

Yes, Paul -- excuse me, Greg, it's Joe. It could be. We have not tried to guesstimate kind of what would happen in there as a result of this and -- but that's our best projection but obviously, as things play out, we'll be making updates.

Frederick J. Boyle

Right. So to be clear, it doesn't reflect any, say, system undergrounding, et cetera, which may flow from the task force report.

Greg Gordon - ISI Group Inc., Research Division

So I guess I'm wondering, there's a couple vectors to this question, could it cause the number -- overall number to go up? Could it cause the timing of certain spending to be sooner or later, and could more -- obviously, we're all wondering what percentage of your spending might come under some of these more timely recovery mechanisms?

Frederick J. Boyle

This is Fred. The answer would be yes. We could have some accelerated spending. What's reflected in the timing in the CapEx that's been presented there does not contemplate a change associated with that task force report. As we roll forward, and we go through the next round of rate cases, we anticipate capturing some of what's in those report or what's in that report in our next filing, but we need to work through them with the Commission and see the outcome of that, which would then drive timing and amount.

Greg Gordon - ISI Group Inc., Research Division

Great. Final question, I just wasn't 100% clear to me. I know you did the forward sale of equity for 19 -- 17.92 million shares and then you just received some cash in the door from the lease terminations. So did you say that you'd be executing the full amount, you'll still be executing the full amount or has something changed?

Frederick J. Boyle

We will be executing the full amount. We were just noting it'll most likely be the latter part of February 2013 when we'll execute the full amount of the equity forward.

Greg Gordon - ISI Group Inc., Research Division

But the $200-some-odd million of lease termination proceeds, were those contemplated or not contemplated?

Frederick J. Boyle

Those were not complicated earlier in the year. That just arose because we were contacted about terminating a lease and we chose to go ahead with it, so that's what the $200 million that came had not been contemplated.

Greg Gordon - ISI Group Inc., Research Division

And use proceeds then?

Frederick J. Boyle

We're paying down short-term debt commercial paper.

Operator

Our next question is from the line of Kit Connelly [ph] from EGC [ph].

Unknown Analyst

Tony, I was trying to think of the toughest questions I could, but I just came up with softball questions. So but just to follow on your comments on the task, the response to the task force, I think you guys are -- you said something to the effect of look for the timing to coincide with the filing of the rate case in Maryland, is that -- I mean, does that -- are you suggesting that you -- we should have some action by the PSC giving us an indication of what any new policies they may have before a rate case is filed or how should -- what should we look for there?

Joseph M. Rigby

Yes, Kit [ph], we're not anticipating at this point that the Commission would be taking action in advance of less -- I'll just say, in our case of our rate case filings. So I think the next, the question that Paul asked was, what's the next key date, and that's why I said it would really be related to our filings per the schedule that's on the slide deck.

Unknown Analyst

So just to be clear, so you would be thinking in terms of, you file the rate case and you say, by the way, here's what the task force recommended, and we feel like you should now act on these recommendations in light of our rate case and what we're proposing going forward for investment?

Joseph M. Rigby

Yes, I think that's a fair way to look at it.

Unknown Analyst

Okay, fair enough. And maybe can you summarize for us the reaction to your performance in Sandy by some of the local folks? I saw some stuff in the paper where the D.C. Mayor was very complimentary and the governor even sounded, after the initial boot up the backside comment, sounded a little more positive later, but anything on the local folks in Montgomery County who seem to want instantaneous power all the time?

Joseph M. Rigby

Kit, I would say that across the entirety of our service territory, we are very grateful for the tone and the support before, during and after the event. And so yes, it's -- this is certainly a different tone than what we experienced in June and July when the Derecho came through. I would say that it's not a case where we worked any harder. We worked as hard as we could in both circumstances. Obviously, when you know a hurricane is coming, you can do a lot to prepare, which we obviously did. We did do some things differently this time on the communications front, not the least of which was to embed reporters from the Washington Post right into the process, sitting in our storm room to actually watch what happens. It is -- you can't experience that and not have a different feeling for what's happening. So across -- I'm not aware of any negative commentary that's come our way, and we're very grateful for that. And candidly, I believe that along with the constructive tone of the task force work plus just the hard work that our people are doing is improving the general tone in the areas that we operate. We're as good as our last storm, and we're -- we have to just stay focused, and that's what we're going to do.

Unknown Executive

Sounds good. One final area, separately, Fred, I think -- can you just review what you said about O&M levels this year compared to March?

Frederick J. Boyle

Yes, that earlier the range that we had given at the beginning of the year was $850 million to $880 million, that right now we expect to be in the more $890 million to $900 million range.

Unknown Analyst

And is the $890 million to $900 million, is that kind of the new normal jumping off point going forward?

Frederick J. Boyle

Well, as we look forward, we're going to continue to spend on the reliability. We haven't projected any 2013 O&M levels at this point in time. We'll give more color around that early next year. That said, I wouldn't see a significant change, and that I wouldn't expect a significant change as we roll forward.

Operator

Our next question is from the line of Ashar Khan [ph] from Visium.

Unknown Analyst

I just wanted to -- this is what I'm trying to achieve. I'm trying to get a more normalized 2012 so I can kind of like build my 2013 earnings projection for the company. So if I'm right, starting off this morning, $1.20 is the midpoint of the guidance. And am I right, the $0.04, which is to me like a onetime, is part of that? So if one strips that out, a more normalized number might be $1.16, first question.

Frederick J. Boyle

Well, depending on how you want to treat it. We identify the items. So included in our guidance range of $1.15 to $1.25 is $0.04 associated with the termination of that lease, which is really involved in us managing that lease portfolio.

Unknown Analyst

Okay. Second, if I'm right, I could have my things wrong. You've said, of course, Energy Services is going to be $5 million after-tax next year, which is about $0.02. If I'm right, Energy Services this year is like $0.05 year-to-date, am I correct? So that's like a decrement of $0.03 year-over-year?

Frederick J. Boyle

Year-to-date, Energy Services, yes, it's right around there.

Unknown Analyst

Right. So from that, we should be subtracting about another $0.03 variance next year unless, I don't know what the projection is for the fourth quarter, whether it's breakeven or what?

Frederick J. Boyle

So yes, as we indicated then, as we look to 2013 as far as the absolute dollar, we're looking at about $5 million, which would be in the $0.02 to $0.03 range.

Unknown Analyst

Okay. Okay. So that's about like $0.06 decrement from year-over-year. And then, just going -- I know you provided us the new CapEx there, slightly higher, $100 million over. But I don't see a rate base slide unless I missed it, can we use the previous rate base slide and add something like $100 million to the '13 rate base that you provided us?

Frederick J. Boyle

Well, we'll be providing updates as we have in the past, but we haven't provided that yet when we're -- as far as the roll forward on our rate base numbers for a 5-year period. So as far as how you're adjusting, and not really being that familiar with your model, it's tough for me to sit here and say.

Unknown Analyst

Okay. And then one thing I don't know if you can help us is that how much of the rate increases that you got this year, how much of those are not incorporated in this year's results from an earnings perspective? Is there something that you can help us because they all came in, in different times? And of course, if I'm right, the New Jersey one really does not help this year, it's really next year.

Frederick J. Boyle

Yes, I think Donna would need to get back with you on that and really just to clarify and make sure we're understanding what you're asking there.

Unknown Analyst

Okay. Okay. I'm just asking what -- based on with the decisions you got, how much the earnings came in, in '12 and how much are follow-up earnings that go into '13? That's my question.

Frederick J. Boyle

Any of the impacts from our -- from the rate case results, they're going to be prorated this year and then you'll have the full year impact next year.

Donna J. Kinzel

Ashar [ph], it's Donna Kinzel. On each of the rate case slides in the earnings call slide deck, there's effective date of the rate increase. So you could use that to prorate, but I can walk you through that if you'd like after the call.

Operator

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

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

Tony, congratulations, and thanks for your help through the years.

Anthony J. Kamerick

Thank you.

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

And then just on the task force, what percent of your CapEx do you envision could be eligible for this in the best case scenario, if the commission was very accommodating?

Joseph M. Rigby

Paul, we haven't tried to kind of put an estimate out there. We're in the process of constructing the filings, so it would just be premature for us to try to pony up a number at this point.

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

Okay. And then the $5 million at Energy Services, is that Energy Services or -- in its entirety or would retail energy supply be incremental to that? Or have we kind of wound that down already?

Frederick J. Boyle

Well, the retail energy supply is being wound down, so that would exclude the energy supply. That's the earnings that we're projecting for total PES next year. And the -- as far as the retail side, that's really almost at breakeven as we look forward after this year.

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

Okay. And then in your guidance, what's your contemplated share count, given your new language around the forward sale?

Frederick J. Boyle

Well, for this year we're at approximately 230 million shares.

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

And you were going to do exercise that forward around year end, so it wouldn't have had much of a difference, okay.

Frederick J. Boyle

Right. Towards the end, right.

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

Got it. So it impacts '13 more.

Frederick J. Boyle

It would impact '13, right, and any of the dilution for '13.

Operator

Our next question is from the line of Andrew Levi from Avon Capital.

Andrew Levi

Okay. So just a couple things, just follow-ups. So just on the Energy Services, what were you -- I forget, and obviously I don't have it in front of me, but what were you supposed to earn this year on that? Was that $0.09 a share, if I remember correctly?

Frederick J. Boyle

At the beginning, yes. In our original forecast we were approximately $0.09.

Andrew Levi

Okay. So we're going to do $0.09, next year we'll do $0.02. And it's not possible that you can lose money on that business, right? I would assume breakeven is kind of the worst case, or could it be negative?

Joseph M. Rigby

We wouldn't anticipate losing money at this point. We're working to adjust the cost structure so that's not something that we think would happen.

Andrew Levi

Great. On the sale or the portion of the leases, I understand the plus $200 million and then you give a slide where I think it was $43 million ongoing tax credits, what was that number before you sold so what's the difference, I guess?

Frederick J. Boyle

I'm not positive. I think it was around $50 million, but we'd have to confirm that and get back to you on that.

Andrew Levi

Okay. So that $7 million would be kind of like an after-tax number, right? Is that...

Frederick J. Boyle

On an after-tax -- from an earnings perspective on an after-tax, we're still expecting to be at about $25 million, which isn't a significant change from where it was previously.

Andrew Levi

Okay. So the tax credit changes, but the earnings impact is not significant.

Frederick J. Boyle

Correct.

Andrew Levi

Got it. Okay. And I think you kind of went through all kind of the drivers that get us to next year. And when do you give guidance for '13?

Joseph M. Rigby

We'll give that in the earnings call, at the year-end earnings call.

Andrew Levi

Got it. Okay. One question on that because that was very interested in kind of what -- so you had contracted for 2,500 workers beforehand? Is that what you were kind of saying? It wasn't through the mutual systems program. It was just kind of on your own.

David M. Velazquez

This is Dave. Yes, we had reached out for mutual assistance before the storm started along with most other utilities and that number continued to build. We did not get that many crews prior to the storm arriving, and that number continued to build as the storm impacted our area. There were other areas that became clear it was not going to impact and those utilities began to send crews to us just like now, as the storm has rolled past us, we've restored our outages, we're sending crews to other utilities.

Andrew Levi

And do you belong to several mutual assistance programs, or is it just -- how does that work?

David M. Velazquez

This might be a good discussion maybe when we see you because it kind of gets a little bit involved, but the way -- just at a general level, the way mutual assistance works is utilities belong to either one or more mutual assistance. And in an event like this, we begin to reach out nationally so there's coordination between each of the local or each of the regional mutual assistance groups so that the utilities on the East Coast, we've been drawing from literally across the entire country.

Joseph M. Rigby

We actually belong to 2.

Operator

Our next question is from the line of Dan Eggers from Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

As relates to the New Jersey case, kind of going as long as it did, you get to a settlement that the staff recommended, what's the new strategy in New Jersey maybe to try and get to a more constructive outcome than what was reached in such a long process this time?

Anthony J. Kamerick

Well, Dan, this is Tony. I think our plan is to go back in there and just try to work it so that we can get a result more quickly than 14 months. We don't really have any levers in New Jersey to make use of. So it's basically a process of filing a case and trying to get the parties to settle.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And then in Delaware, just kind of relative to the timing of when you guys are going to file that rate case. Joe, is your expectation that the working group will have a view on what the new kind of a future forward-looking mechanism would be? Or are you guys going to put in some form of a placeholder into the case and hopefully resolve a comprehensive plan…

Joseph M. Rigby

Dan, you're talking specifically with regard to a multiyear settlement?

Dan Eggers - Crédit Suisse AG, Research Division

Yes.

Joseph M. Rigby

I'll ask Tony maybe to...

Anthony J. Kamerick

Well, Dan, I think we've got to let that play out a little bit more. And I think our strategy with what we file in the case in the first quarter next year is really going to depend on how much progress we make on that front. So that's still in the middle.

Joseph M. Rigby

I think it's important for us to get back in there, and I think this is an issue that we can work in parallel. So and I think that I would anticipate that we'll be able to keep both tracks going.

Operator

Our next question is from the line of Ali Agha.

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

Wanted to be clear on Sandy's impact in '12. If I'm hearing you right, you guys had -- you're excluding that, I think, Joe, you mentioned the $45 million to $65 million of costs, some of which is expense, some of which capitalized or deferred. So how should I be thinking about that? Will some of that get expensed and impact you in '12, or should we assume you'll keep it as nonrecurring and keep it out? How should we be thinking about that?

Frederick J. Boyle

This is Fred. You should think of it in terms of generally -- historically, approximately half has been capital. So we don't know yet what the capital O&M split will be. But then, associated with New Jersey and Maryland, historically, we've also then to the extent there is O&M, we've had deferral of that. So as we look at it, we do not expect a significant impact on 2012 from an O&M, but there will be some impact, and we just don't have enough detail right now to say definitively exactly where '12 is coming out.

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

I see. So I guess even to your point, even if there is, it's not enough to move the needle that significantly, given your understanding of deferrals and capitalization, et cetera?

Frederick J. Boyle

That's the expectation. But again, we don't have all the jurisdictional information, so I can't definitively say that.

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

Okay. And second, Joe, having gone through the last round of rate cases, and if I keep the governor's proposal separate but just go through the rate cases specifically, is it fair to say you've come out on the other side pretty much similar to how you had been going in? None of the other deferral mechanism, et cetera, have been approved or ROEs have been under pressure, so is it fair to say that coming out of the other side of this round, you're fairly similar to what we were going in?

Joseph M. Rigby

No. I would say that if I roll clock back 12, 15 months and then kind of look at how things played out, I would say that there's a level of disappointment we feel with regard to the outcomes and our ability to get traction on some of these mechanisms. We think our proposals were clear. And I think that for us it's about, we're going to reload, we're going to re-file. What I do feel is different probably is in general, the tone. I think there's been in the cumulative effect of the work we're doing, I think the interactions we've had with the commission, I think that the performance we've had, even in the Derecho, while we had some criticism here, it was a very different experience in New Jersey for Atlantic City Electric. It was extremely positive. I think that the actions that we're taking in both D.C. and Maryland with regard to the task force indicates an understanding and an awareness on the part of those leaders that there needs to be something different in place. And I'm particularly pleased that in the case of the state of Maryland that there was a very clear recognition that with that accelerated spend needs to have some accelerated recovery. I'm very pleased that we've been able to get into a discussion in the state of Delaware for a multiyear settlement. So while I would say that the last 12, 15 months, those outcomes were disappointing to us, I would say that I'm very pleased with the overall change in the tone. And I think the hard work we're doing, the recognition on the part of our customers that were doing the right things, I feel more -- I feel optimistic. Obviously, all this is going to have to play out but I feel a lot better now than I did, let's say, a year ago going into these cases. But I think that, in all candor that we'd have to say we were disappointed in the outcome of the cases.

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

And last question kind of related to that. I know the last call you had said that you'd go to the next round of rate cases maybe by August, September next year, depending on the outcomes relook at for CapEx needs. Given what you're seeing today and the [indiscernible] Governor's task force in Maryland as well, has your thinking changed? Is it fair to say that going back to the CapEx budget that you feel more strongly that, that spending will happen and maybe even go up? Or is there still a possibility that you'll look to cut back spending as we look forward?

Joseph M. Rigby

That CapEx spend that we put out there, Ali, is for the most part driven from what we think our customers expect of us, obviously to deal with load growth and things like that. So we formulate that plan basically to deliver service to our customers and to meet their expectations. Obviously, as we experience rate case outcomes, we're mindful that we're looking at the impacts of regulatory lag. I think I've been pretty clear that this would be, in my opinion, somewhat imprudent for us to change our behavior with regard to investing and making the improvements. But I also think I've said that obviously, as we get to the end of these cases over a cycle, we're very mindful that there's an expectation on the part of our investors that they're going to be getting an adequate return on that. So it's always a situation where we're evaluating things. But fundamentally, the CapEx plan is created to provide reliable service to our customers.

Operator

Our next question then is from the line of Jay Dobson.

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

Congratulations, Tony, though I am confident you are going to miss these calls. O&M, Fred, the new $890 million to $900 million level, does that include the out of period adjustment you made, so $0.02 for about $7 million pretax?

Frederick J. Boyle

Out of period, you mean where we established the reg asset, the answer would be yes. That includes that.

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

So that includes that. So if we were really going forward looking at sort of 2013, and sort of understanding where I think you were going, which is maybe flat is a good assumption at least to start with, we ought at least take it up by $7 million because that won't occur?

Frederick J. Boyle

Well, that $7 million is in there as a reduction of O&M for this year.

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

Right. Okay. Fair enough. And then, John Huffman, the $5 million expectation for '13, I think Joe was referencing sort of getting your business to an appropriate kind of cost structure, does that $5 million reflect to that adjustment, or if you get to the appropriate cost structure, is that a bigger number?

John U. Huffman

No, that does reflect the action that we've recently taken to lower our cost structure. So that's captured.

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

Okay. Fair enough. And then just so that I've got this straight and it's probably I guess best put to Fred. So we have the $0.04 gain on the cross-border lease termination, we had this $0.02 of sort of O&M storm, which is taking O&M down lower since we're essentially reversing costs we incurred in '11. And then we had, back in the first quarter, the $0.06 benefit for uncertain tax positions that was reversed. So we have like, and I know you don't look at them as nonrecurring certainly for the tax positions since they do move around a lot, but there's sort of $0.12-ish of things folks could question whether they'd recur next year, is that the totality of them?

Joseph M. Rigby

I believe that would be the -- all the items. That's where we try and be clear what we have in and flag it so you can treat it. You could make your own decisions how to treat it for your modeling purposes but those are certainly items that we have called out this year.

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

Perfect. That's great. And then last one, Joe, it's been on a couple other companies calls somewhat fashionable to talk about your dividend. So I haven't heard that on this call yet, maybe just sort of refresh us sort of where you stand on the dividend, and dividend policy.

Joseph M. Rigby

We are committed to the dividend. Was that clear enough, Jay?

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

Outstanding.

Operator

[Operator Instructions] Moving on to our next question is from the line of Charles Fishman from Morningstar.

Charles J. Fishman - Morningstar Inc., Research Division

Another question on Slide 10, the Construction Expenditure Forecast. You indicated from the answer to a previous question that it does not include any of the Maryland task force issues or anything like that, but if I compare it to the last time I saw this slide, the reliability, distribution reliability CapEx is up materially. What is that attributed to, or what jurisdiction, is there any more color you can provide on that line item?

David M. Velazquez

Yes, this is Dave. The numbers are up significantly for reliability. And I would probably call it reliability in aging infrastructure because in there, besides some of the Reliability Enhancement Plan work that we've described, there's also dollars in there for some replacement of older equipment, working not just in the Pepco region but some of the other regions for upgrading some of the sub-transmission lines. Some additional dollars in there to make sure that we're in compliance with the RM 43 regulations, and also in our Gas business, there's an increase in our gas cast iron main replacement program. So there's a number of items in there.

Charles J. Fishman - Morningstar Inc., Research Division

But I know in past conference calls, I mean, there's this chicken and egg: do you spend the money now and hope the regulators treat you fairly or do you push the regulators to take action first? Is there a change in your strategy here, I mean that you've stepped up the reliability and kind of go that route and then go to the regulators and say, see what we did?

David M. Velazquez

I don't think there's been a change in the strategy. This just reflects as we've continued to look at the system over the 5 years going forward, some additional areas where we think it's prudent to make expenditures.

Operator

Our next question is from the line of Richard Roenick [ph] from [indiscernible] Investments.

Unknown Analyst

Just a quick question on D.C. undergrounding. Is sort of $1.5 billion to $5.8 billion still sort of a reasonable range for that? And also, at those numbers, what would sort of an impact to a customer bill look like?

Joseph M. Rigby

Richard, this is Joe. I think what you're referring to is kind of 2 scenarios that laid out from a report that was provided to the D.C. commission couple years ago when there is a look at potential undergrounding back then. So you'll see commentary about kind of the full breadth of undergrounding, which would be kind of close to $6 billion. I would just caution that I think those numbers probably need to be refreshed. I would also just note -- I don't have the specific answer to your question of customer bill impact, but I would note that on the sub-teams that are in place in the District, that is information that's being provided to all the participants that there's an understanding that at the end of the day if we go down this path that we have to be mindful what the ultimate customer impact is.

Operator

Next question, another one from the line of Paul Ridzon from KeyBanc.

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

The higher O&M of $890 million to $900 million, just to clarify that didn't get pushed up because of Sandy, correct?

Frederick J. Boyle

This is Fred. That's correct. It did not get pushed up because of Sandy.

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

What were the drivers?

Frederick J. Boyle

Well, if we look back from earlier in the year, the original range, it's mainly going to be tied in with the system maintenance, some employee related and, as you know, as there was mentioned there, there's some offset then with the reg assets that were established. But it's mainly, it's spend driven by reliability on the system.

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

And I know you haven't given guidance yet, but maintaining $890 million to $900 million next year wouldn't be a bad starting place, correct?

Frederick J. Boyle

Correct.

Operator

That was today's last question. I'd now like to hand back to management for closing remarks.

Joseph M. Rigby

Okay. Thanks, Chris. This is Joe. I want to thank you again for joining us and for your interest and good questions today. Hopefully it was a good dialogue, and we're going to look forward to seeing many of you that were at the call – that were on the call at the upcoming EEI Financial Conference. And with that, have a great day.

Operator

Thank you very much. Okay. So ladies and gentlemen, that does now conclude your conference call for today. And you may now disconnect your lines, and have a great day. Thank you very much for joining.

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