Pepco Holdings Reports First-Quarter 2013 Financial Results; Reaffirms Full-Year 2013 Earnings Guida

Pepco Holdings Reports First-Quarter 2013 Financial Results; Reaffirms Full-Year 2013 Earnings Guidance Range

WASHINGTON--(BUSINESS WIRE)-- Pepco Holdings, Inc. (NYS: POM) today reported first quarter 2013 earnings from continuing operations as follows:

 
Three Months Ended
March 31,

2013

 

2012

 
Net (Loss) Income from Continuing Operations (GAAP)
Net (Loss) Income ($ in millions) $ (430 ) $ 63
(Loss) Earnings Per Share $ (1.82 ) $ 0.28
 
Adjusted Net Income from Continuing Operations (Non-GAAP)
Adjusted Net Income ($ in millions) $ 57 $ 50
Adjusted Earnings Per Share $ 0.24 $ 0.22
 

"Our adjusted earnings from continuing operations reflect our investment in utility infrastructure and the effects of normal weather as compared to the mild winter weather we experienced in 2012," said Joseph M. Rigby, Chairman, President and Chief Executive Officer. "During the first quarter, progress was made on the liquidation of the cross-border energy lease investments and we continued to focus on the execution of our regulatory strategy with the filing of three additional distribution base rate cases. There are now six cases pending across the jurisdictions we serve, aimed at reducing regulatory lag and achieving a rate of cost recovery in line with our rate of investment. The investments made to improve service reliability are on track and we continue to see positive trends in the operating performance of our electric system."


The increase in adjusted net income from continuing operations (Non-GAAP) in the first quarter of 2013 as compared to the same period in the prior year was driven by higher distribution revenue (primarily due to higher rates related to increased investment in infrastructure and the impact of favorable weather), partially offset by higher operation and maintenance expense (mainly due to storm costs incurred in March 2013 and the cancellation of the Mid-Atlantic Power Pathway, or MAPP, project). The 2013 and 2012 periods had favorable income tax adjustments of $11 million and $13 million, respectively.

Non-GAAP Financial Information

Management believes the adjusted net income from continuing operations and related per share data are representative of Pepco Holdings' ongoing business operations. Management uses this information internally to evaluate Pepco Holdings' period-over-period financial performance and, therefore, believes that this information is useful to investors. The presentation of adjusted net income from continuing operations and related per share data is intended to complement, and should not be considered as an alternative to, reported earnings and related per share data presented in accordance with generally accepted accounting principles in the United States (GAAP).

Reconciliation of GAAP Financial Information to Adjusted Financial Information

 
Three Months
Ended

Net (Loss) Income from Continuing Operations - Millions of dollars

March 31,
2013   2012
Reported (GAAP) Net (Loss) Income from Continuing Operations $ (430 )   $ 63
 

Adjustments (after-tax):

-- Pepco Energy Services retail electric supply earnings

-

(4 )

-- Cross-border energy lease charge, including related interest expense on uncertain tax positions

389 -

-- Cross-border energy lease earnings, exclusive of charge

(3 ) (9 )

-- Potomac Capital Investment Corporation (PCI) valuation allowances related to certain deferred tax assets

101 -
     
Adjusted Net Income from Continuing Operations (Non-GAAP) $ 57     $ 50  
 
Three Months
Ended

(Loss) Earnings per Share from Continuing Operations

March 31,
2013   2012
Reported (GAAP) (Loss) Earnings per Share from Continuing Operations $ (1.82 ) $ 0.28
 

Adjustments (after-tax):

-- Pepco Energy Services retail electric supply earnings

- (0.02 )

-- Cross-border energy lease charge, including related interest expense on uncertain tax positions

1.64 -

-- Cross-border energy lease earnings, exclusive of charge

(0.01 ) (0.04 )

-- PCI valuation allowances related to certain deferred tax assets

0.43 -
     
Adjusted Earnings per Share from Continuing Operations (Non-GAAP) $ 0.24     $ 0.22  
 

Discontinued Operations

  • On March 21, 2013, Pepco Energy Services (PES) entered into an agreement whereby a third party assumed all the rights and obligations of the remaining retail customer contracts, the associated supply obligations, gas inventory and derivative contracts associated with the PES retail natural gas supply business. The transaction was completed on April 1, 2013. As a result of the transaction, the retail natural gas business results of operations for the 2013 and 2012 quarterly periods are reported as discontinued operations. For the three months ended March 31, 2013 the net loss from discontinued operations was less than $0.01 per share, compared to net income of $0.02 per share for the same period in 2012.

Earnings Guidance

Pepco Holdings today reaffirmed its earnings guidance range for 2013 of $1.05 to $1.20 per share. The guidance range:

  • excludes the results of discontinued operations and the impact of any special, unusual or extraordinary items,
  • assumes normal weather conditions,
  • excludes earnings or losses associated with the retail electric supply business at Pepco Energy Services, including the net mark-to-market effects of economic hedging activities, and
  • excludes earnings or losses associated with the cross-border energy lease investments, including the associated interest on the tax liability.

Recent Events

Operations

  • Power Delivery electric sales were 11,905 gigawatt hours (GWh) in the first quarter of 2013, compared to 11,344 GWh for the same period in 2012. Heating degree days in the consolidated electric service territory increased by 33 percent for the first quarter 2013 compared to the prior year period. Weather adjusted electric sales were 11,983 GWh in the first quarter of 2013, compared to 12,003 GWh in 2012.
  • As of March 31, 2013, Delmarva Power's installation and activation of smart meters in its Delaware electric service territory was complete, and Pepco had installed approximately 98 percent of its smart meters in its District of Columbia service territory (97 percent activated) and 97 percent of its smart meters in its Maryland service territory (75 percent activated). Delmarva Power began installation of smart meters in its Maryland territory in April. The respective public service commissions have approved the creation of a regulatory asset to defer Advanced Metering Infrastructure costs between rate cases, as well as the accrual of a return on the deferred costs.

Regulatory Matters

  • On April 3, 2013, Pepco Holdings, Pepco, Delmarva Power and Atlantic City Electric filed a response to the Federal Energy Regulatory Commission (FERC) Section 206 complaint filed by the public utility commissions and public advocates in all four jurisdictions. The complainants challenged the base return on equity and the application of the formula rate process, each associated with the transmission service provided by Pepco Holdings' utilities. The response requests that FERC dismiss the complaint on the grounds that it failed to meet the required burden to demonstrate that the existing rates and protocols are unjust and unreasonable.
  • On April 1, 2013, Pepco Holdings, Pepco and Delmarva Power filed a rehearing request of the February 28, 2013 FERC order in connection with the termination of the MAPP project challenging the reduction of the return on equity applicable to the abandoned costs, as well as the denial of 50 percent of the costs incurred prior to November 1, 2008.
  • On March 29, 2013, Delmarva Power filed an electric distribution base rate case in Maryland. The filing seeks approval of an annual rate increase of $23 million, based on a requested return on equity of 10.25 percent. To address the Maryland Governor's Grid Resiliency Task Force Report, Delmarva Power also is requesting approval of a three-year Grid Resiliency Charge (GRC) for costs totaling $10.2 million associated with its plan to accelerate system maintenance and investments in electric distribution infrastructure. The GRC, if approved, would be implemented as a rider that is separate from base rates and would include a return on investment. A decision in the case is expected in the fourth quarter of 2013.
  • On March 22, 2013, Delmarva Power filed an electric distribution base rate case in Delaware. The filing seeks approval of an annual rate increase of $42 million, based on a requested return on equity of 10.25 percent. As permitted by Delaware law, Delmarva Power plans to implement an interim rate increase of $2.5 million on June 1, 2013, subject to refund. A decision in the case is expected in the fourth quarter of 2013.
  • On March 8, 2013, Pepco filed an electric distribution base rate case in the District of Columbia. The filing seeks approval of an annual rate increase of $52 million, based on a requested return on equity of 10.25 percent. A decision in the case is expected in the fourth quarter of 2013.

Financing

  • On March 28, 2013, Pepco Holdings entered into a $250 million unsecured term loan agreement due March 27, 2014. The net proceeds were used to repay the outstanding $200 million term loan that was due April 23, 2013 and for general corporate purposes. The term loan was sized to approximate the IRS deposit of $242 million made on March 4, 2013.
  • On March 18, 2013, Pepco issued $250 million of 30-year first mortgage bonds. The bonds bear interest at an annual fixed rate of 4.15 percent and are due March 15, 2043. The net proceeds from the sale of the bonds were used to repay Pepco commercial paper that was issued to temporarily fund capital expenditures, provide working capital and for general corporate purposes.
  • On February 27, 2013, the equity forward transaction entered into on March 5, 2012 was settled for $312 million (17.9 million shares). Net proceeds were used to repay outstanding commercial paper, a portion of which was issued in order to make capital contributions to the utility subsidiaries, and for general corporate purposes.

Other Non-Regulated

  • In the first quarter 2013, a $389 million (after-tax) non-cash charge to earnings was recorded related to the anticipated disallowance of tax benefits in connection with the cross-border energy leases. The charge included $307 million to reduce the carrying value of the cross-border energy lease investments. The charge also included anticipated additional net interest expense related to estimated federal and state income tax obligations for the period over which the tax benefits may be disallowed. The after-tax charge was allocated as if each segment was a separate taxpayer, resulting in interest expense of $16 million and $66 million for the Other Non-Regulated and Corporate and Other segments, respectively.
  • Between 1990 and 1999, PCI entered into certain transactions involving investments in aircraft, aircraft equipment, railcars and other assets. In connection with these investments, PCI recognized deferred tax assets in prior years of $101 million. Following events that took place in the first quarter including court decisions in favor of the IRS, the change in Pepco Holdings' tax position with respect to tax benefits associated with the cross-border energy leases and the decision to pursue liquidation of the lease investments, Pepco Holdings re-evaluated its ability to realize these deferred tax assets and established valuation allowances against the assets, resulting in a non-cash charge to earnings of $101 million (after-tax).
  • Pepco Holdings is pursuing the liquidation of its remaining cross-border energy lease investments. In April, Pepco Holdings entered into early termination agreements with two lessees involving all of the leases comprising one of the six remaining cross-border energy lease investments, and one of the leases included in a second lease investment. The net cash proceeds received were $168 million. A $17 million (after-tax) loss is expected in the second quarter of 2013 representing the excess of the carrying value of the terminated lease investments over the net cash proceeds received by Pepco Holdings.

Further details regarding changes in consolidated earnings between 2013 and 2012 are provided in the schedules that follow. Additional information regarding financial results and recent regulatory events can be found in the Pepco Holdings, Inc. Form 10-Q for the quarter ended March 31, 2013 as filed with the Securities and Exchange Commission, and which is also available at www.pepcoholdings.com/investors. Pepco Holdings, Inc. routinely makes available this and other important information on its website, which is a key channel of distribution for Pepco Holdings, Inc. to reach its public investors and to disclose material, non-public information. Information on the website is not part of this news release.

Conference Call for Investors

Pepco Holdings, Inc. will host a conference call to discuss first quarter results on Friday, May 3 at 10 a.m. E.T. Investors, members of the media and other interested persons may access the conference call on the Internet at http://www.pepcoholdings.com/investors or by calling 1-866-788-0544 before 9:55 a.m. The pass code for the call is 88036725. International callers may access the call by dialing 1-857-350-1682, using the same pass code 88036725. An on-demand replay will be available for seven days following the call. To hear the replay, dial 1-888-286-8010 and enter pass code 51582003. International callers may access the replay by dialing 1-617-801-6888 and entering the same pass code 51582003. An audio archive will be available at PHI's website, http://www.pepcoholdings.com/investors.

Note: If any non-GAAP financial information (as defined by the Securities and Exchange Commission in Regulation G) is used during the quarterly earnings conference call, a presentation of the most directly comparable GAAP measure and a reconciliation of the differences will be available at http://www.pepcoholdings.com/investors promptly after the conclusion of the conference call.

About PHI: Pepco Holdings, Inc. (NYS: POM) is one of the largest energy delivery companies in the Mid-Atlantic region, serving about 2 million customers in Delaware, the District of Columbia, Maryland and New Jersey. PHI subsidiaries Pepco, Delmarva Power and Atlantic City Electric provide regulated electricity service; Delmarva Power also provides natural gas service. PHI also provides energy efficiency and renewable energy services through Pepco Energy Services.

Forward-Looking Statements: Some of the statements contained in this news release with respect to Pepco Holdings, Pepco, Delmarva Power and Atlantic City Electric, including each of their respective subsidiaries (each, a "Reporting Company"), are forward-looking statements within the meaning of the U.S. federal securities laws, and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "might," "will," "should," "could," "expects," "intends," "assumes," "seeks to," "plans," "anticipates," "believes," "projects," "estimates," "predicts," "potential," "future," "goal," "objective," or "continue" or the negative of such terms or other variations thereof or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause one or more Reporting Company's or their subsidiaries' actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Therefore, forward-looking statements are not guarantees or assurances of future performance, and actual results could differ materially from those indicated by the forward-looking statements. The forward-looking statements should be read together with the risk factors included in the "Risk Factors" section and other statements contained in each Reporting Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 1, 2013, and in each Reporting Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and investors should refer to these risk factor sections and other statements. All of such factors and forward-looking statements are difficult to predict, contain uncertainties, are beyond each Reporting Company's control and may cause actual results to differ materially from those contained in forward-looking statements. Any forward-looking statements speak only as to the date this news release was issued, and none of the Reporting Companies undertakes any obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for a Reporting Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on such Reporting Company's or its subsidiaries' business (viewed independently or together with the business or businesses of some or all of the other Reporting Companies or their subsidiaries) or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.

 
Pepco Holdings, Inc.
Earnings Per Share Variance
2013 / 2012
 
  Three Months Ended March 31,
       
Pepco
Power Energy Other Non- Corporate Total
Delivery   Services   Regulated   and Other   PHI

2012 Earnings per share from Continuing Operations (GAAP) (1)

$ 0.21 $ 0.02 $ 0.04 $ 0.01 $ 0.28
 

2012 Adjustments (2)

-- Pepco Energy Services retail electric supply

-

(0.02 ) - - (0.02 )

-- Cross-border energy lease earnings

-     -     (0.04 )   -     (0.04 )
 
2012 Adjusted earnings per share from Continuing Operations (Non-GAAP) 0.21 - - 0.01 0.22
 

Change from 2012 Adjusted earnings per share from Continuing Operations

Regulated Operations
-- Distribution Revenue

- Weather (estimate) (3)

0.03 - - - 0.03

- Rate Increases

0.03 - - - 0.03

- Other Distribution Revenue

0.01 - - - 0.01
-- Network Transmission Revenue (0.01 ) - - - (0.01 )
-- ACE Basic Generation Service (primarily unbilled revenue) 0.02 - - - 0.02
-- Operation & Maintenance (0.02 ) - - - (0.02 )
-- Other, net (0.01 ) - - - (0.01 )
Pepco Energy Services - 0.01 - - 0.01
Corporate and Other - - - (0.01 ) (0.01 )
Net Interest Expense (0.01 ) - 0.01 (0.01 ) (0.01 )
Income Tax Adjustments - - (0.01 ) - (0.01 )
Dilution (0.01 )   -     -     -     (0.01 )
 
2013 Adjusted Earnings (loss) per share from Continuing Operations (Non-GAAP) 0.24 0.01 - (0.01 ) 0.24
 

2013 Adjustments (2)

-- Cross-border energy lease charge - - (1.36 ) (0.28 ) (1.64 )
-- Cross-border energy lease earnings - - 0.01 - 0.01

-- PCI valuation allowances related to certain deferred tax assets

-     -     (0.43 )   -     (0.43 )
 
2013 Earnings (loss) per share from Continuing Operations (GAAP) (4) $ 0.24     $ 0.01     $ (1.78 )   $ (0.29 )   $ (1.82 )
 
(1)  

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