Pepco: Infrastructure investments drive higher 3Q13 earnings

The majority of the capital expenditures (CapEx) in Pepco Holdings’ (NYSE:POM) $5.8bn CapEx plan for the 2014 to 2018 period to improve system reliability and enhance customer service in the power delivery business will happen in 2015 and later, Joseph Rigby, Pepco chairman, president and CEO, said during the company’s 3Q13 earnings call Nov. 6.

The company updated its CapEx plan for that time period in its 3Q13 8-K filing made in conjunction with the 3Q13 earnings report.

Those CapEx expenditures will comprise $1.4bn for transmission and $4.4bn for distribution, including $2.3bn that will be invested in reliability projects that will include the replacement of aging infrastructure, Rigby said during the company’s quarterly earnings call.

“I don’t expect there would be much CapEx spent in 2014; maybe a little bit at the end of the year,” Ribgy said. “Over year two through year eight, we’ll probably spend $150m to $200m a year.”

Notably, the CapEx plan does not include the expenditures for the District of Columbia power line undergrounding project involving Pepco’s Potomac Electric Power Company. Expenditures for that project will be added to the CapEx plan following the approval by the Public Service Commission (PSC) of the District of Columbia of the project and the corresponding cost recovery mechanism, he said.

“The power line undergrounding initiative is a seven- to 10-year, $1bn program to underground up to 60 high-voltage distribution feeder lines, which have historically been most impacted by storms and overhead-related outages,” Rigby said.

Pepco and the District of Columbia will evenly split the funding of the initiative.

The company has also reduced its planned distribution and related capital expenditures in New Jersey by approximately $135m in 2014 and 2015, to more closely align the company’s spending with the revenue. That move is due largely to the outcome of the recent distribution base rate case decision for Pepco’s Atlantic City Electric, Rigby said, noting that the reduction is in addition to the projected reduced spending of approximately $5m in 2013.

Rigby also highlighted the results of the distribution rate case for Pepco’s Delmarva Power in Maryland. The decision issued Aug. 30 by the state PSC resulted in a $15m annual increase in base rates and a 9.81% return on equity for purposes of calculating the allowance for funds used during construction at regulatory asset carrying costs. The PSC also approved $4m of priority feeder projects, which will be recovered through a grid resiliency charge implemented as a rider that is separate from base rates and includes a return on investment.

“The grid resiliency charge allows for contemporaneous cost recovery and is a positive step forward in reducing regulatory lag,” Rigby said.

Looking ahead, company officials are optimistic that the improvements made in the infrastructure in its service territory will allow it to achieve greater rates of return in future rate cases, which can be important in the face of growth that is expected to be flat, with less than 1% customer and sales growth.

“The fundamental performance of the infrastructure across the entire footprint is significantly improved, which I think bodes well for more productive and reasonable outcomes in our rate cases,” Rigby said. “I’m somewhat cautiously optimistic that, with all the work that we’ve done, we’ve been able to close this chapter as we move forward.”

Pepco, which is also the parent company of Pepco Energy Services (PES), on Nov. 6 reported 3Q13 earnings of $101m, which company officials said was driven in part by its investments in infrastructure.

“The increase of adjusted earnings, quarter over quarter, was primarily due to higher distribution revenue resulting from higher rates driven by increased infrastructure investments and lower operation and maintenance expense,” Rigby said.

He noted that the increase in earnings was partially offset by lower weather-related sales in the company’s service territories that do not have revenue decoupled from sales.

On a GAAP basis, earnings from continuing operations for 3Q13 were $110m, compared to earnings of $87m for 3Q12. The 3Q12 earnings included an asset impairment charge at PES, which Rigby said was not representative of the ongoing business operations, and which reduced GAAP earnings from the non-GAAP figure of $88m.