Pepco Holdings Earnings Call Insights: Tax Adjustments, Maryland Order

On Friday, Pepco Holdings Inc (NYSE:POM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Tax Adjustments

Paul Patterson – Glenrock Associates: The tax adjustments, I’m sorry if I missed this. What was causing that?

Frederick J. Boyle – SVP and CFO: This is Fred. The tax adjustments related open years going back to as far as 2003 and the bulk of those relate to some mixed service cost which is overhead allocation capitalization issue that we’ve reached agreement with the IRS.

A Closer Look: Pepco Earnings Cheat Sheet>>

Paul Patterson – Glenrock Associates: So that’s kind of a little unusual, right? We’re not going to –

Frederick J. Boyle – SVP and CFO: It wouldn’t be an ongoing item. A lot of it is the interest that had been accrued associated with provisions we’d established for that.

Paul Patterson – Glenrock Associates: I heard your comments on the Maryland order that you guys were filing a notice of appeal on. Could you go over that a little bit just to elaborate a little bit more on that, you said there was an impact on the SOS customers, if you could just, I’m sorry I do not completely comprehend it.

Joseph M. Rigby – Chairman, President and CEO: Paul, this is Joe, then I’ll turn it over to Tony. A primary concern we have is in recovering these costs specifically or only through SOS customers, creates the possibility that if they migrate then more of those costs are borne by the remaining SOS customers and that’s a concern that we had raised in the very beginning and it’s one that we take seriously because we’re concerned about the potential impact on customers. The other issue that we are concerned about is long-term power agreements and the potential negative impact that could have on the balance sheet. So, we feel strongly about this. This doesn’t surprise the commission and we thought it was important to express this in the notice of appeal. Tony, I don’t know if I miss anything?

Anthony J. Kamerick – EVP and Chief Regulatory Officer: No, I think you got it all.

Paul Patterson – Glenrock Associates: You guys also outlined this issue I think in a letter, you and a couple of other – some other utilities in Maryland outlined this issue prior to the execution contract I believe, right?

Joseph M. Rigby – Chairman, President and CEO: That’s correct.

Paul Patterson – Glenrock Associates: I guess, the SOS part, why are they – what was the reason I guess for making SOS customers that would have to be the – why wouldn’t it be just a distribution company issue, as opposed to, do you see what I am saying?

Frederick J. Boyle – SVP and CFO: We totally see what you’re saying. In other states where we have had I will say different but somewhat similar situations we’ve looked to have something like this to be part of a non-by passable distribution charge across all customers. But I mean obviously I can’t speak for the Commission in this particular case, we can only speak to the position that we have.

Paul Patterson – Glenrock Associates: So they haven’t articulated. I was just wondering if they had.

Frederick J. Boyle – SVP and CFO: I don’t know that we’ve had any articulation of that reasoning.

Paul Patterson – Glenrock Associates: Then a leap year impact. Is that in there in that decline that weather-adjusted decline, does that include the benefit of the leap year or does it exclude it?

Frederick J. Boyle – SVP and CFO: Well it would include the leap year. It is reflected in the weather-adjusted numbers.

Paul Patterson – Glenrock Associates: So the numbers are even lower than – the growth is even lower. And you guys have been seeing this for some time and you guys have decoupling and I realize that. But just in general could you sort of give us some thoughts about the regions you are operating in and what the long-term usage patterns you guys are expecting? Like I said you guys already have decoupling, you saw those before but just how should we think about that?

Joseph M. Rigby – Chairman, President and CEO: Paul, this is Joe and I’ll take a shot at this and Fred can jump in. In some ways across the three service territories it’s a mixed bag and it kind of gets worse as you go from West to East. Pepco’s doing I had say pretty decently and obviously that’s supported by the impact of the government. We have been seeing employment growing – started growing back in 2010. We are also seeing real personal disposable income per employee grow. I think that if you look at in aggregate across the service territories I think we had paid year-over-year sales growth at 1.9% and looking at customer growth at 0.9%. So obviously the customer growth is more applicable to the areas of decoupling. If you go further east to Delmarva, it’s also in somewhat of a recovery mode perhaps not as strong as that you would see in Pepco, but we are seeing employment growth and growth in real personal disposable income. When you get to Atlantic City, it’s a little different story. The recovery is slower. Employment in the ACE region was hit very hard, actually had experienced negative employment growth through October of last year. So it is beginning to pick up, but certainly the pace is slower, and from I guess an econometric view that the employment in southern New Jersey is not expected to return to I’ll say pre-recession levels in the foreseeable future, and we are obviously more susceptible in there because we have decoupling in place. So like I said, it’s a mixed bag and I think we are the beneficiaries to some extent around the decoupling. Paul, just to be responsive on the other issue you raised about the about the Maryland order, I think our General Counsel may have wanted to make a quick comment.

Kirk J. Emge – SVP and General Counsel: The statutory authority under which the Commission issued its order directing the electric distribution companies to sign the contracts relates to the procurement of standard offer service, so it’s my understanding that they felt like they had to have the charges placed on the standard offer service customers more to comply with the statute.

Paul Patterson – Glenrock Associates: So, it’s the law, thank you.

Kirk J. Emge – SVP and General Counsel: That’s their interpretation, yes.

Maryland Order

Matt Davis – Credit Suisse: Just going back to the Maryland order, if you do not receive a stay and they actually move forward with the construction of the plant, and considering that guys were not on the plant, would the construction create any economic exposure for you?

Frederick J. Boyle – SVP and CFO: Well I think, this is Fred, that’s going to be determined on the final terms of contracts right now under the order were to negotiate terms with the developer and those haven’t been finalized, so those need to be finalized and submitted to the Commission for approval. As Joe noted, one of our concerns is being put in the position where we may have to incur data, reflect the liability on our books which would not have a positive impact on our credit metrics, so that is certainly something we’re concerned about and we’d like to see addressed.

Matt Davis – Credit Suisse: Then, could you just provide some additional details on the lower OPEB expense in the quarter and whether we are going to see any additional savings throughout the year?

Frederick J. Boyle – SVP and CFO: When you say OPEB…

Matt Davis – Credit Suisse: I mean the…

Frederick J. Boyle – SVP and CFO: That is something that we think that will only be in the first quarter of this year. As we look forward, I wouldn’t factor in continued upside associated with that. It’s unique situation given some quarter-over-quarter when we look at what occurred in the first quarter of ’11 versus ’12, so it’s not something we anticipate being ongoing.

Matt Davis – Credit Suisse: Then just one last question, how much help did you get from decoupling to offset the weak weather demand?

Frederick J. Boyle – SVP and CFO: This is Fred again. The decoupling was worth about $0.04 for the quarter for us.