Q4 2012 Earnings Call Transcript
Transcript Call Date 03/01/2013

Operator: Good day, ladies and gentlemen, and welcome to the Q4 2012 Pepco Holdings Inc., Earnings Conference Call. My name is Miranda, and I'll 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. As a reminder this conference is being recorded for replay purposes.

I would now like to turn your call over to Ms. Donna Kinzel, Vice President and Treasurer. Please go ahead.

Donna J. Kinzel - Director, IR: Thank you, Miranda, and good morning, ladies and gentlemen. Welcome to the Pepco Holdings fourth 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 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 impacts are described in our earnings release dated today. The earnings release can be found on our website at www.pepcoholdings.com/investors.


Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Thanks, Donna and good morning, ladies and gentlemen. Thank you for joining us today. 2012 was a year of significant progress on our key initiatives. Throughout the year, we invested nearly $1.2 billion in transmission and distribution infrastructure, including projects focused on enhancing reliability and installing advanced technology throughout our service territory. These investments are significantly improving our operating performance and restoration efforts as demonstrated during two severe weather events in 2012.

As seen on Slide 3, 2012 GAAP earnings from continuing operations were $285 million compared to $260 million in 2011. Excluding items that we feel are not representative of our ongoing business operations, which Fred will discuss later on the call. 2012 earnings would have been $277 million compared to $283 million in the prior year.

Power Delivery earnings increased year-over-year largely due to higher electric transmission and distribution revenue, resulting from higher rates driven by increased investment in infrastructure. However, this increase in earnings was more than offset by lower adjusted earnings at Pepco Energy Services due to the wind down of the retail energy supply business and lower energy services construction activity.

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 importance beginning with the cross-border energy leases.

As seen on Slide 4, on January 9th of this year, the U.S. Court of Appeals for the Federal Circuit issued an opinion in Consolidated Edison's case, which disallows tax benefits associated with certain of Con Ed's cross-border energy lease transactions. As a result of the court's position in this case, we have updated our assessment of PHI's cross-border energy lease investments under applicable accounting standards, including whether it is more likely than not that PHI will prevail in litigation.

We have concluded that we no longer meet the more likely than not standard and as a result PHI expects to record an estimated after-tax non-cash charge to earnings of between $355 million and $380 million in the first quarter of this year. This range reflects the recalculated book value of the equity investment in the leases given the revised anticipated timing of tax benefits generated from the lease investments.

The range also reflects the anticipated interest expense on the estimated federal and state income taxes payable for the period from January 1 2001, through March 31, 2013. PHI continues to believe that penalties will not be accessed by the internal revenue service and therefore no liability for a penalty is reflected in this estimated charge. While PHI has long-held that its tax position with regard to the cross-border energy leases is appropriate we are now assessing our litigation strategy.

In addition PHI plans to make a deposit of approximately $240 million with the IRS in the first quarter to mitigate ongoing interest costs relating to the tax liabilities associated with changing the tax treatment on these lease investments. This amount is inclusive of certain tax benefits arising for matters unrelated to the cross-border lease portfolio including the carryback or carryforward of net operating losses in the application of certain amounts already on deposit with the IRS.

The deposit will be funded by a combination of available sources of liquidity and short-term borrowings. We continue to evaluate the liquidation of the cross-border lease portfolio. Proceeds from any liquidation will be used to repay borrowings incurred to fund the deposit. We estimate any partial or complete liquidation would be accomplished within one year. While the Company is disappointed in the court's decision in the ConEd case and the resulting financial impacts to us, it will not affect our core utility operations.

The leases are legacy investments which were made between 1994 and 2002 through Non-Regulated subsidiaries. Improving system reliability continued as a top priority for our Company in 2012. Our reliability enhancement efforts, which initially focused primarily in the Pepco region, were extended across the service territories of Atlantic City Electric and Delmarva Power. We continue to make very good progress in advancing infrastructure improvements.

As I mentioned in 2012, our utilities invested nearly $1.2 billion in the Power Delivery business as shown on Slide 5. These investments were aimed at enhancing the distribution and transmission systems. Our efforts to improve system reliability are yielding meaningful results, as we continue to see positive trends in the operating performance for our electric system. As shown on Slide 6, the overall reliability performance for each of our utilities improved by 21% to 33% in 2012 as compared to 2011. On average, customers experienced significantly fewer and shorter outages.

We've also seen improvement in customer satisfaction. A recent survey by J.D. Power indicates that overall customer satisfaction has increased for Pepco, Atlantic City Electric and Delmarva Power. In particular, customer ratings have improved for power quality and reliability, which are key drivers of customer satisfaction. In January, the Edison Electric Institute presented Pepco Holdings with the Emergency Recovery Award and the Emergency Assistance Award for our restoration efforts and assistance to other utilities following Hurricane Sandy. While there is always more work to be done, we are pleased that these indicators point to our customer's experience in an improved level of service.

During 2012, we continued our progress in the development of the smart grid by implementing Advanced Metering Infrastructure or AMI and distribution automation. I am pleased to say that in November 2012, we reached a milestone of installing our 1 million smart meter. The status in each of our jurisdictions can be seen on Slide 7.

Meter installation and activation is essentially complete for electric customers in Delaware and is nearing completion for Pepco's customers in the District of Columbia. For Pepco's customers in Maryland, meter installation and activation is well underway and for Delmarva Power's Maryland customers, the commission has authorized the implementation of AMI and meter installation is expected to begin shortly.

Customer benefits include the availability of more detailed account specific information on energy usage, fewer estimated bills, enhanced billing options, as well as an outage detection capability, which helps makes the restoration process more efficient. As approved by the respective commissions, regulatory assets have been created to assure recovery of and a return on AMI related cost between rate cases.

Additionally, in connection with AMI, PHI is implementing the critical peak rebate form of dynamic pricing, which enables customers to experience additional benefits from the smart grid. Under the critical peak rebate structure, customers are rewarded for lowering their energy use during critical peak periods when energy demand and the cost of supplying electricity are higher.

In the Delmarva Power Delaware and Pepco Maryland jurisdictions approximately 12,000 customers in total participated in the phase and stage of the program in 2012 and we received positive feedback, with the remaining eligible customers able to participate in 2013. This critical peak rebate structure and similar implementation phase-in has been approved in concept for Delmarva Power Maryland pending AMI deployment. Due to the expansion of the smart grid and implementation of dynamic pricing, we will enable customers to better manage their energy use and lower their energy bills, while we gain added tools to improve system reliability.

Now, turning to sales in Slide 8, while our customer account was essentially unchanged in 2012 as compared to 2011, whether adjusted kilowatt hour sales decreased by 1% due to lower residential and commercial sales at Pepco and lower residential and industrial sales at Atlantic City Electric. The portion of the impact of the lower sales was offset by revenue decoupling mechanisms we have in place, demonstrating the effectiveness of this rate redesign. With the decoupling in place in Maryland and the District of Columbia, approximately two-thirds of the distribution revenue was to couple from consumption.

Given our planned $5.9 billion investment in our electric system over the next five years, it is critically important to ensure timely and reasonable cost recovery through constructive regulatory outcomes, because the rate case outcomes received in 2012 fell short of what is needed to earn our authorized rates of return. We are filing base rate cases in each of the jurisdictions we serve.

Slides 9 through 12 provide details of the three pending cases. In fact, there was case in Maryland; Delmarva Power natural gas case in Delaware; and Atlantic City Electric's case in New Jersey, as well as the timing of our upcoming cases. We plan the file Pepco's case in the District of Columbia shortly; Delmarva Power's electric cases in Delaware and Maryland by the end of this month. In total, the three pending rate cases request an annual rate increase of $143 million, based on requested returns on equity of 10.25%. All three cases include request for 12 months of forward-looking reliability plant additions in the test period.

In Pepco's case in Maryland, in addition to the requested base rate increase, we have requested approval of a three-year grid resiliency charge to provide for the timely recovery of proposed accelerated reliability spending to address the recommendation in the Maryland Governor's Grid Resiliency Task Force Report. The proposed incremental spending that would be cut – that would be recovered by the charge is $175 million of capital expenditures for the selective undergrounding and upgrading of feeders and $17 million of maintenance spending for accelerating tree trimming. We plan to incorporate a request for a similar charge in Delmarva Power's case in Maryland.

In the District of Columbia the Mayor's Task Force continues to focus on the issue of undergrounding power lines to improve electric system reliability. A written report is expected to be delivered to the Mayor later this month. Following a separate track from Atlantic City Electric's base rate case in New Jersey, an order issued on January 23rd by the New Jersey Board of Public Utilities regarding a review of its consolidated tax adjustment policy is noteworthy. The BPU is soliciting input from stakeholders, including utilities to determine whether to continue to use of the policy and if so how to calculate the savings that arise from filing the consolidated tax return and share those savings between the utility and the rate payer.

In the order, the BPU acknowledges that while it has used various methods over time to calculate the consolidated tax savings adjustment, the federal income tax laws and the corporate structure of many utilities have changed and it is therefore appropriate to review its consolidated tax adjustment policy. We continue to believe the use of consolidated tax adjustment is inappropriate and note that the BPU is one of the very few regulatory jurisdictions across the country that applies such an adjustment. We expect the resolution of the current cycle of cases in the second half of this year.

As I have noted, reducing regulatory lag is a significant focus. Our preference continues to be to achieve this by adopting mechanisms that mitigate the need for frequent rate case filings, what -- which we view as costly and inefficient. During 2012, we made progress in working with regulators and public officials to identify long-term reliability improvements and the corresponding timely recovery of an adequate return on investment and we look forward to continued progress this year.

On Wednesday, state commissions and public advocates for our jurisdictions filed a joint complaint with FERC challenging the base return on equity of PHI's utilities and the application of the formula rate process. The complaint claims have supported ROE with the zone of reasonableness between 6.78% and 10.33% and they arrive at a base ROE of 8.7%. Currently authorized ROE for PHI's utilities is 11.3%, which includes a base ROE of 10.8% plus a 50 basis point adder for being a member of a regional transmission organization. We believe that complaint is unsupported and intend to vigorously defend our current ROE and the formula rate process.

Yesterday, FERC issued an order in the Mid-Atlantic Power Pathway or MAPP abandonment proceeding. The order concludes that the MAPP project was canceled for reasons beyond the Company's control except the prudence of the abandonment costs and the amortization period for hearing. They denied the inclusion of the incentive adders and applied a 10.8% return on equity to the abandonment cost. They also denied 50% recovery of costs incurred prior to November 1, 2008, which is approximately $2 million. We are evaluating that the decision including our legal alternatives.

Like other ESCO's Pepco Energy Services had a challenging 2012 driven by a downturn in the state and local government markets. The market decline stemmed from PES's customer's reluctance to incur debt associated with energy efficiency projects, as well as lower energy prices, which lessened the benefit of ESCO projects. As shown on Slide 13, contract signings were significantly lower in 2012 compared to the pace in prior years.

We estimate additional adjustments to reduce its cost structure in the fourth quarter, but the expectation of continued state and local government market challenges in 2013, we believe activity in the federal government sector is picking up. PES was selected to develop two energy efficiency projects in fourth quarter and see more opportunities in the combined heat and power and underground transmission and distribution construction businesses. Despite current conditions, we continue to believe the fundamental long-term market exists for energy efficiency projects.

As for the retail energy supply business wind down is on track, with substantially all of Pepco Energy Services retail customer obligations ending by in June 2014. PES is currently reviewing strategic alternatives to accelerate the completion of the wind down of the remaining retail energy contract portfolio into 2013.

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

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Good morning and thank you for joining us today. I'll 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. Slide 14 summarizes our earnings for the full year and fourth quarter of 2012 and identifies items that we feel are not representative of our ongoing business operations. GAAP diluted earnings from continuing operations for 2012 were $1.24 per share, compared to $1.15 per share for the full year of 2011.

Our 2012 earnings include $0.06 per share for mark-to-market gains resulting from economic hedging activities associated with the retail energy supply business of Pepco Energy Services and impairment charges related to Pepco Energy Services' assets, which reduced earnings by $0.03 per share. Excluding these items our 2012 adjusted diluted earnings from continuing operations were $1.21 per share, compared to the 2012 guidance range of $1.15 to a $1.25 per share. Adjusted earnings from continuing operations for the full year 2011 were $1.25 per share.

For the fourth quarter of 2012 GAAP diluted earnings from continuing operations were $0.18 per share, compared to $0.10 per share for the 2011 period. Excluding mark-to-market effects and the impairment charges at Pepco Energy Services, diluted earnings from continuing operations for the three months ended December 31, 2012 would've been $0.19 per share compared to $0.15 per share for the 2011 period.

A summary of the drivers of our financial results can be found on Slides 15 and 16. Power Delivery diluted earnings were $1.02 per share, compared to $0.93 per share in 2011. Higher distribution and transmission revenue increased earnings by $0.12 per share and $0.07 per share, respectively. The higher revenue was due to higher rates driven by increased investment in utility infrastructure. This increase in earnings was partially offset by higher operation and maintenance expense, primarily due to higher employee related and customer support costs, higher interest expense due to an increase in outstanding debt in 2012, and lower default electric supply margins, primarily due to a favorable adjustment in 2011 for cost recovery of higher cash working capital costs.

Each of these items decreased earnings by $0.03 per share. Lower weather-related sales versus the prior year decreased earnings by $0.02 per share. Heating degree days were lower by 11% and cooling degree days were lower by 2% in 2012 as compared to 2011. Keep in mind that our distribution revenue in Maryland in the District of Columbia, which represents approximately two-thirds of total distribution revenue is decoupled from consumption.

On our previous earnings call, we provided a forecast of total 2012 Power Delivery O&M expense of $890 million to $900 million. Actual O&M for Power Delivery in 2012 was $901 million. The effect of major storms had minimal impact on total O&M due to offsetting factors. As shown on Slide 17, O&M includes $4 million and $6 million of restoration costs that were not deferred for the derecho and Hurricane Sandy respectively. Substantially offsetting these costs was $9 million of lower expense due to the establishment of a regulatory asset for recovery of restoration costs incurred for the January 2011 winter storm that had previously been expensed in 2011.

At our upcoming Analyst Conference, we will provide our expectations for 2013 Power Delivery O&M expense. For the fourth quarter of 2012, Power Delivery earnings were $0.18 per share compared to $0.11 per share for the fourth quarter of 2011. The increase in earnings was primarily the result of higher distribution and transmission revenue due to higher rates partially offset by higher interest expense and lower default electric supply margins due to a favorable adjustment in 2011 for cost recovery of higher cash working capital costs.

Pepco Energy Services adjusted earnings were $0.05 per share for the full year 2012 compared to $0.18 per share in the prior year. As adjusted, PES incurred a loss of $0.01 per share for the fourth quarter of 2012 compared to earnings of $0.04 per share for the 2011 period. The decrease in earnings for both the full year and fourth quarter was due to lower retail electric supply volumes resulting from the ongoing wind down of the retail energy supply business and lower energy services construction activity. We continue to expect PES after-tax earnings of $5 million in 2013.

In our other non-regulated segment earnings was $0.17 per share in 2012 compared to adjusted earnings of $0.18 per share in 2011. The decrease in earnings was primarily due to favorable income tax adjustments in 2011 partially offset by an increasing gains from early terminations of certain cross-border energy leases in 2012. For the fourth quarter of 2012 earnings were $0.03 per share compared to $0.02 per share for 2011 period. In our corporate and other segment which is primarily unallocated corporate costs earnings improved by $0.01 per share for the full year and fourth quarter.

Now I'll turn to some topics of interest for 2013. In the second quarter of 2011 PHI implemented a modified pension investment policy, known as a liability-driven investment strategy. With the plans allocation of fixed income investments was increased with the reduction in the allocation to equity investments. The change in investment policy was designed to decrease contribution and expense volatility. For 2013, we estimate the pension and other post-retirement benefit costs to be approximately $99 million across PHI, as compared to $110 million in 2012. Historically, about 70% of this amount is reflected in our operating expense with the balance charged to capital.

So, as seen on Slide 18, we estimate that the pension and other postretirement benefit expense will be approximately $69 million in 2013 as compared to $77 million in 2012. Additionally, although we project there will be no minimum funding requirement in 2013. Under the Pension Protection Act, in January 2013, PHI, Delmarva Power and Atlantic City Electric made discretionary tax deductible contributions totaling $60 million in accordance with our policy to bring the plan assets to at least the funding target level for 2013 under the Pension Protection Act, as compared to $200 million contribution made in 2012. The funded status of the plan at year end 2012 was approximately 82%.

Earlier this week the equity forward transaction entered into on March 5, 2012 was settled for $312 million. Proceeds were used to repay outstanding commercial paper, a portion of which was issued in order to make capital contributions to the utilities and for general corporate purposes. We do not plan to issue additional equity in 2013 beyond the approximately $40 million we issue annually through our dividend reinvestment plan. While we will discuss our financing needs in more detail at our upcoming Analyst Conference, we now believe our next equity issuance will be beyond 2014, given the expected proceeds from unwinding the cross-border energy leases.

Turning to our earnings guidance, as seen on Slides 19 and 20, our 2013 earnings guidance range is $1.05 to $1.20 per share. The guidance range assumes normal weather conditions for the year and excludes earnings or losses associated with the retail energy supply business of Pepco Energy Services, including the net mark-to-market effects of economic hedging activities. It also excludes earnings or losses associated with the cross-border energy lease investments, including the associated interest on the tax liability.

Looking at our guidance range for 2013 versus our adjusted earnings for 2012, significant drivers that are expected to have a positive impact on earnings include lower expenses, the annualized impact of the 2012 rate case outcomes and constructive outcomes for our current round of base rate cases. As I mentioned, our guidance range assumes normal weather resulting in a positive adjustment of $0.02 per share since 2012 had the low normal heating degree days.

Factors that are expected to have a negative impact on earnings in 2013 as compared to 2012 include the loss of earnings from the cross-border energy lease portfolio in the Pepco Energy Services retail energy supply business, higher Power Delivery depreciation expense, higher interest expense and higher common shares outstanding. Also keep in mind that in 2012, we realized a gain on the early termination of cross-border energy leases of $0.04 per share and benefited from $0.06 per share of net tax adjustments.

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

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Thanks, Fred. 2012 was a year of significant challenge and significant progress, but we are certainly not satisfied with our earned returns. We are pleased with our progress implementing the Smart Grid and the improvements we have made in reliability and storm restoration. Looking ahead, we remain focused on our strategy to invest in utility infrastructure while recognizing that constructive regulatory treatment is critical.

In addition, we believe that the cross-border energy lease issue is manageable from both the cash flow and earnings perspective and the issue will not impact our core business strategy. But the loss of the cross-border lease earnings may lengthen the timeframe to achieve dividend payout ratio in line with our peers, I'm confident in our ability to grow regulated earnings over time and as you think about our future, I want to remind you that we remain committed to the dividend and solid investment grade credit ratings.

With that, we'd like to open the call to your questions.

Transcript Call Date 03/01/2013

Operator: Paul Patterson, Glenrock Associates.

Paul Patterson - Glenrock Associates: First just quickly I'm not exactly clear in terms of what's in 2013 with respect to the energy supply and the services? In the release it seemed to suggest that supply was completely out of earnings, is that correct?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Yes, as far as what's in the $5.05 to $5.20 guidance range we're excluding any profits as it relates to the energy supply business. What is reflected in there as it relates to the energy services is $5 million after-tax of income, which is consistent with what we had disclosed last quarter.

Paul Patterson - Glenrock Associates: That's winding down?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: No, the $5 million would be ongoing and as we look forward what's winding down is the retail supply business and that's what's been excluded from the guidance range.

Paul Patterson - Glenrock Associates: What would be the impact of supply business that was included?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: For 2013, it was going to be a nominal amount. There was going to be a material – I don’t know specifically but not expecting much contribution if any.

Paul Patterson - Glenrock Associates: With the respect to the – could you give us some flavors to what your earned ROEs were for 2012 in your jurisdictions?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well we have the earned ROEs for the companies but not by jurisdiction for, Atlantic City was approximately 4.5%, Delmarva was approximately 8%, Pepco was approximately 8% and an overall for the Company we are at about 6.5%.

Paul Patterson - Glenrock Associates: Obviously what would you say just generally speaking the numbers would be for 2013 in your guidance?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well in the guidance we haven't provided what the final targeted numbers are going to be. So it will be really a function of where we end up within the range.

Paul Patterson - Glenrock Associates: But within that range, I mean just roughly speaking what should we be thinking about what's your – because I mean it looks like you guys would have a lag situation here. I'm just trying to get a sense as to what you think – what the 2013 guidance is sort of predicated on?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: The 2013 guidance is based on reasonable regulatory outcomes. We do not have specific outcomes reflected that we are disclosing that are embedded in there. If you look at the midpoint of the range and were to extrapolate from that for PHI ROE I don't have that right here. But that's what I would look to.

Paul Patterson - Glenrock Associates: Then in terms of the derecho order that came out – if I am pronouncing that correctly, it did look like they were really all that supportive of trackers at least in the near term and they also were talking about performance based ratemaking in the negative sense and it looks like they I mean they didn't really outlined exactly what the CapEx should be? It looks like they are going to be investing that more. But how do you guys feel about that? How do you feel about the derecho order and the issue associated with regulatory lag at least with the set amount?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: I think in general we thought that it was okay. Obviously, there was going to be more homework that they are asking us to do to go back and look at things we could do both in the near-term and I'd say the longer-term over five years. I think in a lot of ways, the way in which we would look at certainly in the mid and longer-term aligns very much to the governor's Grid Resiliency Report. So, I think at least from where we sit here that the path forward will be pretty clear as to what to do. I think it would be premature to kind of speculate the issues around performance-based ratemaking. We did in fact in our filing for Pepco Maryland proposed a $1 million penalty or $1 million upside dependent on outcomes. I guess the one thing I -- and we can obviously talk offline, but I didn't find the order to be necessarily negative with regard to their approach to a tracker. I mean one of the things that they did say in the report pretty clearly is that additional investment that would be required would certainly need to be recovered and as far as I'm concerned, I think the path ahead was better defined in the Grid Resiliency Report, which actually did recommend a tracker.

Paul Patterson - Glenrock Associates: It seems to me though in Footnote 39 that they were saying that although the recommendation that have for us work for a tracker that they built at a rate case to be more appropriate the reason why they do it in a vacuum. So, I also sort of see where you're coming from in terms of it doesn't I mean the okay kind of approach. I guess what I'm wondering here though is that you guys have had this revelatory lag issue, you got a pretty high payout and I guess what I'm wondering as without any sort of tracker or sort of quicker recovery without an improvement in regulatory lag, it would suggest to me like -- additional CapEx would have to have a substantial amount of equity funding and that's where I'm leading to is, how should we think about your needs for equity given these big CapEx – looks like you're going to have substantial CapEx for all these reliability issues from public policy perspective, it looks like you're going to probably have to issue a lot of equity and it looks like you've got a high dividend. How should we think about those all those things that you're sort of managing and do you follow where I'm coming from, in other words how should we think about the dividend equity issuance in the big CapEx program given what we're seeing here or is too early to say?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well, I'll make the comment I think for everyone to say something. We just noted in Fred's prepared remarks that we see that we're now not going to need equity until or beyond 2014. So as we look over the horizon and we do anticipate that we're going to be getting – we're going to be making progress on the lag that not only can we push the equity out, but that we also can certainly remain committed to the dividend. I think the one thing that I just would go back to the derecho report I felt pretty good about was there was a very fundamental recognition that there was a gap between what the delivery system can do and what the expectations of customers are after a severe weather event. So I look at that as a very positive signal. It is indicating that the steps we have been taking for the last two years are in fact the right steps. But I think that to kind of get to the core of your question, I think the next chapter in this story is going to unfold for us over the next couple of months and obviously what we are looking at is the Pepco Maryland rate case outcome at the end of June.

Paul Patterson - Glenrock Associates: In terms of the lack of need for equity in the near-term, why is that? Because it looks like retained earnings isn’t going to be particularly high and on a GAAP basis – well just in general even on an operating basis it doesn’t look like you are going to have much of a growth in retained earnings. Why is that, you guys don’t need to issue equity? How we should we think about how things are going to be funded or what do you expect equity ratios to go to?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: As far as the need for equity, as we look forward and Joe had mentioned the cross-border energy lease and we anticipate that there will be partial or complete liquidation associated with those leases over the next 12 month period. As we disclosed previously the tax consequences of the leases on a stand-alone basis were projected to be approximately $600 million of tax and $100 million to $150 million of interest. We felt through the unwind we had be able to address most of the tax needs. Because of our NOLs and certain other tax attributes, the total amount we are paying is significantly less than that. So, as we look forward and continue to execute on an unwind strategy that's what's going to help us delay the need for equity at least beyond 2014.

Paul Patterson - Glenrock Associates: So you will have – the cash coming in from that should take care of your CapEx needs is how we should look at that?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Yes. As far as equity needs, that's correct.

Operator: (Andy Levi, Avon Capital).

Andrew Levi - Avon Capital: Just have a couple numbers related questions. I'm trying to understand your guidance little bit better, so just a few questions, if you don't mind. First, on the $0.10 of O&M savings that you have for 2013, where is that coming from?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: The genesis of that about half of that is employee related savings and including benefits versus '12 and about half of it is driven by sourcing related activities that we've taken that will be reducing overall cost. It does not relate at all to any cut in reliability spend.

Andrew Levi - Avon Capital: So, that's all power services, so I guess you have O&M going down about $35 million year-over-year, is that correct?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: I would equate to something in that range.

Andrew Levi - Avon Capital: Then in your guidance of $1.05 to $1.20, you have like little lines that include the impact of regulatory outcome. So, what gets you to the $1.20, are rate increases that would take effect this year from current cases that are filed?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well, it would be -- the impact of rate increases that are filed this year, there is nothing reflected in the waterfall charge here as it relates to those. So, that would be the largest element of that, however, versus the other operating variances that occur every year and the guidance range could be related to O&M weather et cetera.

Andrew Levi - Avon Capital: O&M, you already have right and weather is supposed to be considered normal?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Yeah, I guess yes. So, I was saying embedded in the range at the high end of the range in any year there could be weather impacts and other variability as it relates to operations. However what's reflected in here so that's an element to get the high-end range, but the majority of it would be associated with just ongoing the base rate case activity we have.

Andrew Levi - Avon Capital: Right and that's where I get confused, because you've asked for, as you noted $143 million or rate increases most of those rate increases if not all would only come online at the end of June or later. So if you tax effected that and you didn't have any expenses relating to that, that would mean you would need $70 million in the second half of the year in rate relief and that would be on an annual basis $140 million of rate relief, which is exactly what you're asking. So, I can't get to the top end of your range or anywhere close to that, the low-end I can see I can get to that number, but can you possibly reconcile that for me?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well, we can follow-up with you on that, but as far as the midpoint and high-end it's going to be based on the timing of the outcomes of these rate cases any settlements associated rate cases. There is a lot of variability in other cases that are yet to be filed, but again if embedded in any range there is more than just the current year rate cases, there is the other operating activity that's an element of it that that would certainly impact getting to the high-end.

Andrew Levi - Avon Capital: It seems almost impossible to me. Then on the Maryland case where you're asking for $60 million, if I'm not mistaken, the $15 million of that is for forward test year is that correct?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: That sounds correct. Approximately $15 million is associated with forwarded reliability additions through '13.

Andrew Levi - Avon Capital: So maybe your starting point is 45. Then the last question I have and I apologize for asking so many questions. Back to Paul's question on the dividend, Joe, if you don’t get to the high end of the range you are going to have another year of close to or above 100% payout ratio again. I have no idea where your regulators fallout on but at what point and here I know you have been very, very adamant about maintaining the dividend. But how many years down the line do we get where if the payout ratio doesn't (impact) substantially and you have 18 million shares coming online this year, you think the Board or management needs to take a look at paying that dividend versus I don’t know saving $100 million or $150 million a year that could be used to spend on CapEx?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Andy I guess the short of it is that we are not there. I think it's pretty clear that 2013, showed up early on with headwinds and I think we have pretty quickly are working our way through to resolve that. You're right. I mean there's a lot of – there's a huge dependency with regard to the outcome of the rate cases, but I like fuel that – I feel fairly optimistic that the tone in the jurisdictions has changed. I see no reason to think that we are not be able to continue to make good headway in reliability and customer satisfaction. So, while there is some headwinds and obviously we are not pleased that '13 is a kind of probably a best, it's a holding pattern with regard to where we wanted to be a real step – I had have to say a step backwards in terms of where we wanted to be relative to the guidance. We can see our way through this and we had a thorough discussion with the Board several times already this year and the commitment to the dividend remains.

Andrew Levi - Avon Capital: Because ultimately you are not going to get rate relief from the past, meaning that the under earnings that you were given by the regulators, they are not going to all of a sudden say hey, we screwed up in the past, so here is some extra money. So kind of looking at your increases that you are asking for today, it seems like it's going to take quite some time to kind of work your way to a more normal payout ratio, but I guess as you said you'll deal with that as it comes. That's I think enough for me. I'll let somebody else go.

Operator: Charles Fishman, Morningstar.

Charles Fishman - Morningstar: On the waterfall chart again on Slide 20, the $0.12 differential or the $0.12 loss, the differential on the cross-border leases between '12 and '13. Did I understand that there was $0.04 benefit from the cross-border leases included in '12? So, help me get to that $0.12 loss? Is there a $0.08 loss then in '13 from the unwinding? How do you get the $0.12?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well, the $0.12 is associated with just what we would have expected to have in 2013 associated with the leases had we not have had the ConEd decision. The $0.04 maybe what you're referencing is if you look at the waterfall chart there, you will see we had a gain during 2012 on an early termination of a lease, that's $0.04 I'm not certain if that's you're referencing for us.

Charles Fishman - Morningstar: Then on the consolidated tax adjustment proceeding, how many states that have a collect that I mean that's out of the norm and it's a minority, correct?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Yeah, I think it is maybe as few as three states that imposed that, but I'm not positive I know it's very few.

Charles Fishman - Morningstar: So your position is pretty good relative to other states correct?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well, if you look at it from a national perspective this would be an outlier however it's something we've been dealing with in New Jersey for some time.

Charles Fishman - Morningstar: On PES certainly your target customer is a lot of government agencies does the sequester help or hurt that business the energy efficiency piece because you would think maybe smart enough to be looking at what you offer?

John U. Huffman - President and CEO, Pepco Energy Services: This is John Huffman. Yeah, indeed we've pulled our federal customers and the sequestration is not expected to have any negative impact, in fact, you're right. Some of the federal agencies including the U.S. Army have been directing their different groups to look at our energy performance contracts as a way to deal with this sequestration measures.

Operator: Dan Eggers, Credit Suisse.

Matthew Davis - Credit Suisse: Hi, guys. It's actually Matt Davis. Just one question on Maryland, what are your thoughts on the BG order and how that kind of aligns with the directives that are coming from the Governor and how that's going to translate into what you guys are looking to do there?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Well in looking at that order, the Commission allowed 975 ROE and as far as any forward additions, I think this goes back to one of the questions I was asked previously. They did not allow forward additions through the end of 2013. So those are the kind of two high-level takeaways I had have from that.

Matthew Davis - Credit Suisse: I mean just from reading the order it seemed like they were pretty – that some of the tone was pretty – a lot more negative and less constructive than we would have assumed given what the Governor has kind of laid out, any thoughts around that?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: No. I would go back to what Joe commented previously as it relates to the derecho report and I did not believe BG&E had reflected in their filing anything associated with the Governor's Task Force Report, which we had in ours. In the derecho report, the Commission did note that rate cases would be the appropriate vehicle for addressing the tracker et cetera, at least that was my read as it relates to the task force report, which we have in our case. So that'll obviously be something we are focused on as we move forward.

Matthew Davis - Credit Suisse: Then just a question on the cross-border leases. What's the process from here to moving forward with like final closure on the transactions and unwinding them as you look forward throughout the year?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well we will be communicating and coordinating with the lessees as we move forward. As you are probably aware over the past two years we actually did early terminations. So, we have executed on unwinds for different reasons over the past two years, but we were able to – once there was agreement, be able to move forward relatively quickly on the unwind. So, we anticipate that we'd have that completed hopefully by the end of the year.

Operator: Ashar Khan, Visium.

Ashar Khan - Visium: If I can just – I was just trying to pinpoint the waterfall chart with the way you report. You report usually within three, four segments. One is the Power Delivery, then the Pepco Energy Services, then the other Non-Regulated and Corporate and Other and what you reported was $1.02, $0.05, $0.17 and minus $0.03 to $1.21. The waterfall chart you are showing you are going to lose 12 plus 4. So, if I'm right going forward in '13 really there are no earnings in Other Non-Regulated? Is that – I have a couple of questions, but just starting off with that, is that a fair thing that the Other Non-Regulated section really goes down to zero?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Yes. We'd expect there to be very minimal contribution from that section, yes.

Ashar Khan - Visium: Then the section which is Pepco Energy Services, you said that section would be $5 million of net income. So, that section should be then $0.02 is that correct?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: That's an appropriate way of looking at it.

Ashar Khan - Visium: Then the corporate and other section is that – how should, one would like negative $0.03? I don't know where all these tax adjustments and all that fall, is it safe to assume that's $0.03 or what should be a good ballpark number for that for '13?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: I would think it should be a little bit less than that than the $0.03, but as we look forward in – if you look at that between that and the Power Delivery, it was really what the other adjustments relate to.

Ashar Khan - Visium: So, then kind of like to so – then by default then Power Delivery, if you take the midpoint $1.12 subtract $0.02 for Energy Services, $1.10 and then kind of like add that thing. So, then Power Delivery is kind of like increasing. It seems like by about $0.10 or so for the year, right, if I'm in the right ballpark?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: I have to check that. Somebody could follow-up with you on that.

Ashar Khan - Visium: I guess, Joe, the big thing is as you can see right, with the rate cases do add earnings, but its dilution, which kind of kills us. So, I guess we avoid dilution in '14. But is there a way to kind of like do it better, so we can avoid it on a more longer period of time, I'm just trying to get a sense?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Yeah. I think it looks like having more progress on the rate cases.

Operator: Ali Agha, SunTrust.

Ali Agha - SunTrust Robinson Humphrey: As you referred to I think during your remarks the complaint that was filed on your FERC ROEs. Can you just remind us what's the process for that complaint to be resolved and what's the size of the rate base on which those ROEs would be used?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: I believe we'll be filing a reply to the complaint before the end of this month. So, we'll be vigorously opposing that as I look at the rate base size that this report relates to, our transmission rate base is around $1.5 billion. So 100 basis points swing in ROE equates to about $7.5 million impact on net income.

Ali Agha - SunTrust Robinson Humphrey: If I recall from the numbers that that's what they're asking for – they are asking for what eight point – could you just remind us of those numbers again?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: Yes. The midpoint that they were asking for – they were proposing a base ROE of 8.7% and currently our base ROE is 10.8%. Then we have 50 basis point adder for being in an RTO which takes our rate up to 11.3%.

Ali Agha - SunTrust Robinson Humphrey: Then also just to clarify the guidance range for '13 and the implications from the rate cases, if I am hearing you right, I just want to be clear, to get to the high end of that range, the $1.20-ish, you are assuming that you get almost everything you ask for, is that right or am I missing something there?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: What I said is that within the range the rate case outcomes are a big driver of where we are going to fall in the range in addition to other operating activities and any other benefits that occur through the year as we have had in prior years. So to get to the high-end we certainly would contemplate having good success in the rate cases and by that I mean really getting a chance to earn an authorized ROE in addition to other elements as it relates from an operational perspective.

Ali Agha - SunTrust Robinson Humphrey: But to be clear when you are looking at the range you don’t look at say zero to 100 and put that in, you make some of other adjustments when you're thinking of that?

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: When you say zero to 100…

Ali Agha - SunTrust Robinson Humphrey: In terms of what you get back from what you've asked and that the range assumes that you have got all that you asked on the high end and then you get nothing on the low-end or do you, I'm just…

Frederick J. Boyle - SVP and CFO, Pepco Holdings, Inc.: No, the range – no it doesn't.

Ali Agha - SunTrust Robinson Humphrey: Lastly, Joe, coming back to you. In the past, you've talked about – at one time you said you will relook at your large CapEx program depending on how these latest round of rate cases come out and then I think more recently, you had indicated that you are fairly committed to spending that amount in terms of reliability and other reasons. Just your latest thoughts, is the CapEx budget pretty much locked in right now over the next five years or would you now potentially revisit that depending on the rate case outcomes?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well, Ali, the plan is to plan. Obviously, you always allow yourself the opportunity to reconsider as events unfold, but our view of the future is reflective of that plan. So, I really – I'm not veering off that. That that's, what we expect to do. We demonstrated we could spend $1.2 billion last year and I think the most important thing of that is the positive impact that's had on our customers that I think is the vital ingredient to getting a reasonable regulatory outcome.

Operator: Noah Hauser, Decade Capital.

Noah Hauser - Decade Capital: Could you give us a little bit more color around the process at (Mass DPU) as far as the CPA is concerned?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well, right now, they've set up the generic proceeding. However, there is no procedural schedule that's been established at this point in time. So, I can't add anything other than that. I can't point to a specific timeline right now.

Noah Hauser - Decade Capital: Can you tell us how about how much of the ace rate base is kind of attributable to the (CTI)?

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Well, if you look back at the filings we had last year and what it was proposed by rate council had the effect of decreasing our rate base, it was $300 million to $400 million or something like that, almost 40% of our rate base was eliminated by what was proposed and staff then basically took a view the way I would interpret it that they cut it in half basically something to that effect. So, that's the orders of magnitude that we were dealing with and are dealing with.

Operator: There are no further questions at this time. I would now like to turn the call over to you.

Joseph M. Rigby - Chairman, President and CEO, Pepco Holdings, Inc.: Okay, thanks. This is Joe Rigby. Again thank you all for joining us today and for your interest in PHI. Our Annual Analyst Conference is scheduled for March 14 in New York and if you have not received an invitation, please contact our Investor Relations staff and I hope the analysts in the call will be able to join us. With that have a great weekend. Take care.

Operator: Thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect. Have a great day.