Pepco Holdings' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Start Time: 11:00

End Time: 12:11

Pepco Holdings, Inc. (POM)

Q2 2012 Earnings Call

August 7, 2012 11:00 a.m. ET

Executives

Donna Kinzel – VP, IR

Joe Rigby – Chairman, President & CEO

Fred Boyle – SVP & CFO

John Huffman – CEO, Pepco Energy Services

Tony Kamerick – Chief Regulatory Officer

Analysts

Paul Patterson – Glenrock Associates

Dan Eggers – Credit Suisse

Shahriar Pourreza – Citigroup

Paul Ridzon – KeyBanc

Ali Agha – SunTrust

James Dobson – Wunderlich Securities

Noah Hauser – Decade Capital

Andrew Levi – Avon Capital

Gregg Orrill – Barclays

Maurice May –Wellington Shields

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two 2012 Pepco Holdings Earnings Conference Call. My name is Ian, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) And as a reminder, the call is being recorded for replay purposes.

And I would now like to turn the call over to Donna Kinzel, Vice President of Investor Relations. Please proceed, ma’am.

Donna Kinzel

Thank you, Ian, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings second 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 our 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?

Joe Rigby

Thanks, Donna, and good morning, ladies and gentlemen, and thanks for joining us today.

As seen on Slide 3, earnings from continuing operations for the second quarter of 2012 were $62 million compared to $95 million for the second quarter of 2011. The 2012 and 2011 earnings include the effects of mark-to-market activity and the 2012 earnings also include an asset impairment charge at Pepco Energy Services.

We view these items as not representative of our ongoing business operations. Excluding these items, earnings for the second quarter of 2012 would have been $57 million compared to $97 million for the second quarter of 2011. The decrease in adjusted earnings quarter over quarter was primarily due to favorable income tax adjustments in the 2011 quarter for prior tax years, higher power delivery operation and maintenance expense and lower Pepco Energy Services earnings.

Later in the call, Fred will address the financial results in our operating segment performance in more detail. But first, I’ll address some important matters starting with the recent distribution rate case orders in Maryland.

On July 20, we received decisions in both the Pepco and Delmarva Power distribution base rate cases in Maryland, which we found to be disappointing. A summary of the decisions can be found on Slides 4 and 5.

For Pepco, the Commission approved an $18 million annual increase in electric distribution base rates based on a 9.31% return on equity, but directed Pepco to reduce the amount of the rate increase by the annual cost of certain energy advisory programs and seek recovery of these costs through the EmPower Maryland Program. This reduction is currently estimated at $1.5 million.

Lower depreciation rates were approved resulting in an annual reduction of depreciation expense of approximately $27 million. The Commission also authorized recovery of $9 million of storm costs that were charged to operation and maintenance expense in 2011. The reversal of this expense and the establishment of the regulatory asset will occur in the third quarter.

For Delmarva Power, the Commission approved an $11 million annual increase in electric distribution base rates based on a 9.81% return on equity and authorized lower depreciation rates resulting in an annual reduction of depreciation expense of approximately $4 million. In both cases, the new distribution rates and depreciation rates were effective July 20.

The Commission rejected our proposals aimed at timely cost recovery in both cases and authorized a return on equity for Pepco that is among the lowest in the country. We view the Commission’s unwillingness to adopt mechanisms that would enable timely cost recovery to be disappointing and that it will necessitate the filing of frequent rate cases. While our deep and experienced regulatory staff is prepared to pursue this path, we view the frequent rate cases as inefficient and costly to the customer.

In response to these orders, we have extended our current hiring freeze indefinitely and we are in the process of rigorously reviewing our overall operating expenses. We are currently evaluating the orders to determine what actions, if any, to pursue. Also in Maryland, on July 25, the governor issued an executive order to find ways to improve and strengthen the state’s electric distribution system. The executive order sets in place a process to evaluate the effectiveness and feasibility of underground lines in selective areas, options for other infrastructure investments in the electric distribution system and options for financing and cost recovery for capital investments.

This group, led by the administration’s energy advisor, is tasked with reporting back to the governor within 60 days regarding recommended legislative changes, regulatory reforms and other executive branch actions. We endorse the dialog initiated by the governor and look forward to supporting and participating in the process.

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