Pepco Holdings reports second-quarter 2012 financial results; reaffirms full-year 2012 earnings guidance

Pepco Holdings, Inc. (NYSE: POM) today reported second quarter and six months ended June 30, 2012 earnings from continuing operations as follows.














Three Months Ended   Six Months Ended
    June 30,   June 30,
   

2012

 

2011

 

2012

 

2011

Net Income from Continuing Operations (GAAP)                
Net Income ($ in millions)   $ 62   $ 95   $ 130   $ 157
Earnings Per Share   $ 0.27   $ 0.42   $ 0.57   $ 0.69
                 
Adjusted Net Income from Continuing Operations (Non-GAAP)                
Adjusted Net Income ($ in millions)   $ 57   $ 97   $ 125   $ 161
Adjusted Earnings Per Share   $ 0.25   $ 0.43   $ 0.55   $ 0.71
                 

The decrease in adjusted net income from continuing operations (Non-GAAP) in the second quarter of 2012, as compared to the 2011 quarter, was primarily due to the favorable impact of income tax adjustments in the 2011 period for prior tax years, higher Power Delivery operation and maintenance expense (primarily due to higher employee-related costs, higher customer support services costs, and a favorable insurance adjustment in the 2011 period), and lower Pepco Energy Services earnings (primarily due to the wind-down of the retail energy supply business and lower energy services project activity). Partially offsetting these negative factors was higher electric transmission and distribution revenue due to higher rates driven by increased investment. The decrease in adjusted net income from continuing operations (Non-GAAP) for the six months ended June 30, 2012, as compared to the same period in the prior year, was driven by essentially the same factors as the quarterly results.

“Our second quarter financial results were in line with our expectations and we continue to make good progress on executing our strategic plan,” said Joseph M. Rigby, Chairman, President and Chief Executive Officer. “However, we recently received decisions in our Pepco and Delmarva Power distribution base rate cases in Maryland and found those to be disappointing. The Commission rejected our proposals aimed at timely cost recovery and authorized a return on equity for Pepco that is among the lowest in the country. We expect to file our next round of rate cases in Maryland in the fourth quarter of this year. A fair and reasonable outcome in the next round of cases will be crucial to continue the pace of investment in Maryland. We remain committed to system reliability and improving the customer experience, but expect timely cost recovery and reasonable regulatory returns. Given the decisions in the Maryland rate cases, we will extend the current hiring freeze and rigorously review our overall operating expenses in Maryland. We remain committed to delivering earnings sufficient to maintain our current dividend level.”

Rigby also noted the impact of a powerful storm that struck the service territory. “In late June, our electric system was once again tested with the arrival of a violent and destructive storm. The high winds uprooted trees across our service territories, causing significant damage to the electric system. Approximately 702,000 customers were without power at the height of the storm, or about 38 percent of our electric customers. By many accounts, this storm was the most destructive storm to strike the Mid-Atlantic region in almost a decade. Our efforts to enhance reliability and customer service over the past two years proved beneficial during the restoration process.” Rigby noted that given the timing of the storm, the impact to the second quarter results was negligible, as most of the costs incurred will be reflected in the third quarter.

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 accounting principles generally accepted in the United States (GAAP).















Reconciliation of GAAP Financial Information to Adjusted Financial Information

         
    Three Months   Six Months
    Ended   Ended

Net Income from Continuing Operations – Millions of dollars

  June 30,   June 30,
      2012     2011     2012     2011
Reported (GAAP) Net Income from Continuing Operations   $ 62     $ 95   $ 130     $ 157
Adjustments (after-tax):                

  Mark-to-market (gains)/losses from Pepco Energy Services retail energy economic hedging activities (($12) million, $3 million, ($12) million, and $7 million pre-tax, respectively)     (7 )     2    

 

(7

 

)

    4
  Impairment charges related to Pepco Energy Services long-lived assets ($3 million pre-tax)     2          

2

     
Adjusted Net Income from Continuing Operations (Non-GAAP)   $ 57     $ 97   $ 125     $ 161
                 













    Three Months   Six Months
    Ended   Ended

Earnings per Share from Continuing Operations

  June 30,   June 30,
      2012     2011     2012     2011
Reported (GAAP) Earnings per Share from Continuing Operations   $ 0.27     $ 0.42  

$

0.57

    $ 0.69
Adjustments (after-tax):          

 

   

 

Mark-to-market (gains)/losses from Pepco Energy Services retail energy economic hedging activities

   

(0.03

)

   

0.01

   

(0.03

)

   

0.02

 

Impairment charges related to Pepco Energy Services long-lived assets

    0.01    

   

0.01

   

Adjusted Earnings per Share from Continuing Operations (Non-GAAP)   $ 0.25     $ 0.43   $ 0.55     $ 0.71
                 

The income tax effect with respect to the foregoing adjustments was calculated using a composite income tax rate of approximately 40 percent.

Earnings Guidance

Pepco Holdings today reaffirmed its earnings guidance range for 2012 of between $1.15 and $1.30 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, and
  • excludes the after-tax net mark-to-market effects of economic hedging activities associated with the retail energy supply business of Pepco Energy Services.

Recent Events

Operations

  • On June 29, 2012, Pepco Holdings’ service territories were severely impacted by a violent and destructive wind storm that uprooted trees across the service territory, causing significant damage to the electric system. Given the timing of the storm, the impact to second quarter results was negligible, as most of the costs incurred for the restoration effort will be reflected in the third quarter. In the second quarter, a total of $3.0 million of incremental storm costs were incurred. Of this cost, $1.2 million was charged to capital expenditures, $1.5 million was deferred as a regulatory asset, and $0.3 million was charged to operation and maintenance expense. The total incremental cost of system restoration is currently estimated to be in the range of $70 million to $85 million. This estimate is based on assumptions related to the costs of services provided by third parties, and actual costs may vary from this estimate. Recovery of the incremental system restoration expenses will be pursued during the next cycle of distribution base rate cases.
  • Power Delivery electric sales were 11,435 gigawatt hours (GWh) in the second quarter of 2012, compared to 11,823 GWh for the same period in the prior year. In the electric service territory, cooling degree days decreased by 11 percent for the three months ended June 30, 2012, compared to the same period in 2011. Weather-adjusted electric sales were 11,282 GWh in the second quarter of 2012, compared to 11,580 GWh for the same period in the prior year, a decrease of 3 percent.
  • As of June 30, 2012, Delmarva Power’s installation and activation of smart meters in its Delaware electric service territory was complete and Pepco had installed approximately 97 percent of its smart meters in its District of Columbia service territory (88 percent activated) and 46 percent of its smart meters in its Maryland service territory (7 percent activated). On May 8, 2012, the Maryland Public Service Commission (MPSC) authorized Delmarva Power to proceed with the implementation of the smart meters in Maryland. 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 July 20, 2012, the MPSC approved an $18 million annual increase in Pepco’s electric distribution base rates based on a 9.31 percent return on equity. The MPSC also directed Pepco to reduce the amount of the rate increase by the annual costs 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. The new rates were effective July 20, 2012. The MPSC also authorized lower depreciation rates resulting in an annual reduction of depreciation expense of approximately $27 million.
  • On July 20, 2012, the MPSC approved an $11 million annual increase in Delmarva Power’s electric distribution base rates based on a 9.81 percent return on equity. The new rates were effective July 20, 2012. The MPSC also authorized lower depreciation rates resulting in an annual reduction of depreciation expense of approximately $4 million.

Financing

  • On August 2, 2012, PHI and its utility subsidiaries amended their $1.5 billion credit facility to extend the expiration date by one year to August 1, 2017 and to decrease certain fees and interest rates payable to the lenders under the facility. All other terms and conditions of the credit facility remain unchanged.
  • On June 26, 2012, Delmarva Power issued $250 million of 30-year first mortgage bonds. The bonds bear interest at an annual fixed rate of 4.00 percent and are due June 1, 2042. Delmarva Power used $31 million of the net proceeds to redeem all $31 million outstanding of 5.20 percent tax-exempt bonds due 2019. The balance of the proceeds was used to repay Delmarva Power commercial paper (that was issued to temporarily fund capital expenditures and working capital, and to redeem $65.7 million of tax-exempt bonds prior to maturity) and for general corporate purposes.