Pepco Holdings Reports Third Quarter 2015 Financial Results

WASHINGTON--(BUSINESS WIRE)--Pepco Holdings, Inc. (NYSE: POM) today reported third quarter and nine months ended September 30, 2015 consolidated earnings as follows:

“While we are disappointed with the decision by the Public Service Commission of the District of Columbia denying our merger application in August, we were pleased to announce the settlement agreement signed earlier this month by Pepco Holdings, Exelon, the District of Columbia government, the Office of the People’s Counsel and other interested parties,” said Joseph M. Rigby, Chairman, President and Chief Executive Officer. “We believe the settlement agreement addresses the issues raised in the Commission’s denial order, and provides significant benefits to our customers and the communities we serve.” Rigby added, “Our earnings continue to be impacted by increased operation and maintenance costs, primarily driven by higher system maintenance costs and the implementation of a new customer information system. We continue to invest and spend to further improve electric system reliability while our merger with Exelon is pending.”

Pepco Holdings’ GAAP net income for the three-month period ended September 30, 2015, was $91 million, or 36 cents per share as compared to $79 million, or 31 cents per share for the same quarter in 2014. Excluding items that we believe are not representative of ongoing business operations, adjusted earnings for the third quarter of 2015 would have been $83 million, or 33 cents per share as compared to $116 million, or 46 cents per share for the quarter ending September 30, 2014.

The primary drivers of the decrease in adjusted net income (Non-GAAP) in the third quarter of 2015, as compared to the same quarter in 2014, were higher operation and maintenance expense (primarily due to increased distribution system maintenance, increased employee-related costs and the implementation of a new customer information system), lower unbilled revenue associated with Atlantic City Electric basic generation service, lower network transmission revenue (mainly due to an increase in refund reserves related to a return on equity challenge), higher utility property taxes and lower Pepco Energy Services tax benefits (due to a favorable adjustment in 2014). Higher electric distribution revenue primarily due to the effects of warmer weather in 2015 partially offset the decrease for the third quarter.

For the nine months ended September 30, 2015, Pepco Holdings’ GAAP earnings were $197 million, or 78 cents per share, as compared to net income of $207 million, or 82 cents per share for the nine months ended September 30, 2014. Excluding items that we believe are not representative of ongoing business operations, adjusted earnings for the nine months ended September 30, 2015 would have been $201 million, or 80 cents per share as compared to $262 million, or $1.04 per share for the same period in the prior year.

The decrease in adjusted net income (Non-GAAP) for the nine months ended September 30, 2015, as compared to the 2014 period, was driven by higher operation and maintenance expense (primarily related to the implementation of a new customer information system, increased employee-related costs and increased distribution system maintenance), higher depreciation expense from increased plant investment and higher interest expense. Higher electric distribution revenue (primarily due to higher rates from increased infrastructure investment, as well as favorable weather) partially offset the decrease for the period.

Non-GAAP Financial Information

Management believes the adjusted net income 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 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 generally accepted accounting principles in the United States (GAAP).

Reconciliation of GAAP Financial Information to Adjusted Financial Information

The income tax effects with respect to the foregoing adjustments, where applicable, were calculated using a composite income tax rate of approximately 40 percent. Most merger-related costs are not tax deductible.

Recent Events

Pepco Holdings – Exelon Merger

• On October 6, 2015, Exelon and Pepco Holdings entered into a Nonunanimous Full Settlement Agreement and Stipulation (DC Settlement) with the District of Columbia Government, the Office of the People’s Counsel and other parties. A motion to reopen the merger proceeding to consider the DC Settlement was filed with the District of Columbia Public Service Commission (DCPSC) that same day. Among other things, the DC Settlement requires a final order, on conditions consistent with the terms of the settlement agreement, be issued by the DCPSC within 150 days of the filing of the motion to reopen the merger proceeding. District of Columbia law does not impose a time limit on the DCPSC’s review of the merger application.
• On October 6, 2015, Exelon and Pepco Holdings agreed that neither party will exercise termination rights under the merger agreement on or after October 29, 2015, unless certain conditions of the DC Settlement are not met, including issuance of a procedural schedule and a final order by the DCPSC approving the merger based on timeframes and conditions set forth in the DC Settlement.
• On October 15, 2015, the New Jersey Board of Public Utilities issued an order extending the effectiveness of its merger approval until June 30, 2016.

Operations

• Power Delivery electric sales were 13,249 gigawatt hours (GWh) in the third quarter of 2015, compared to 12,780 GWh for the same period in 2014. In the electric service territory, cooling degree days increased by 19 percent for the three months ended September 30, 2015, compared to the same period in 2014. Weather-adjusted electric sales were 12,932 GWh in the third quarter of 2015, compared to 12,984 GWh for the same period in the prior year.
• Power Delivery electric sales were 37,125 GWh for the nine months ended September 30, 2015 compared to 36,219 GWh for the nine months ended September 30, 2014. In the electric service territory, cooling degree days increased by 23 percent for the nine months ended September 30, 2015, compared to the same period in 2014. Weather-adjusted electric sales were 35,883 GWh for the nine months ended September 30, 2015 compared to 35,929 GWh for the same period in 2014.
• Pepco Holdings’ capital expenditures for the nine months ended September 30, 2015 were $855 million. Due to the pending merger with Exelon, new distribution rate cases have not been filed since March 2014, although capital expenditures and operation and maintenance expenses have continued or increased from levels in prior periods.
• In the nine months ended September 30, 2015, PES signed $29 million in energy efficiency contracts and $38 million in underground transmission construction contracts. PES signed $33 million in energy efficiency contracts and $53 million in underground transmission construction contracts for the same period in 2014.

Financing

• On July 30, 2015, Pepco Holdings entered into a $300 million unsecured term loan agreement due July 28, 2016. The net proceeds were used to repay outstanding commercial paper and for general corporate purposes.

Further details regarding changes in consolidated earnings between 2015 and 2014 are provided in the schedules that follow. Additional information regarding financial results and recent regulatory events can be found in the Pepco Holdings, Inc. Form 10-Q for the quarter ended September 30, 2015, as filed with the Securities and Exchange Commission, and which is also available at www.pepcoholdings.com/investors. Pepco Holdings, Inc. routinely makes available this and other important information on its website, which is a key channel of distribution for Pepco Holdings, Inc. to reach its public investors and to disclose material, non-public information. Information on the website is not part of this news release.

About PHI: Pepco Holdings, Inc. (NYSE: POM) is one of the largest energy delivery companies in the Mid-Atlantic region, serving about 2 million customers in Delaware, the District of Columbia, Maryland and New Jersey. PHI subsidiaries Pepco, Delmarva Power and Atlantic City Electric provide regulated electricity service; Delmarva Power also provides natural gas service. Through Pepco Energy Services, PHI also provides energy savings performance contracting services, underground transmission and distribution construction and maintenance services, and steam and chilled water under long-term contracts.

Forward-Looking Statements: Some of the statements contained in this news release with respect to Pepco Holdings, Pepco, Delmarva Power and Atlantic City Electric, including each of their respective subsidiaries (each, a “Reporting Company”), are forward-looking statements within the meaning of the U.S. federal securities laws, and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “assumes,” “seeks to,” “plans,” “anticipates,” “believes,” “projects,” “estimates,” “predicts,” “potential,” “future,” “goal,” “objective,” or “continue” or the negative of such terms or other variations thereof or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause one or more Reporting Company’s or their subsidiaries’ actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Therefore, forward-looking statements are not guarantees or assurances of future performance, and actual results could differ materially from those indicated by the forward-looking statements. These factors should be read together with the risk factors included in the “Risk Factors” section and other statements contained in each Reporting Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015, and in each Reporting Company’s Quarterly Reports on Form 10-Q for the quarter ended September 30, 2015, and investors should refer to these risk factor sections and other statements. All of such factors and forward-looking statements are difficult to predict, contain uncertainties, are beyond each Reporting Company’s control and may cause actual results to differ materially from those contained in any forward-looking statements. Any forward-looking statements speak only as to the date this news release was issued, and none of the Reporting Companies undertakes any obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for a Reporting Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on such Reporting Company’s or its subsidiaries’ business (viewed independently or together with the business or businesses of some or all of the other Reporting Companies or their subsidiaries) or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any specific factors that may be provided should not be construed as exhaustive.

SEGMENT INFORMATION

SEGMENT INFORMATION – continued

*Impairment loss of $53 million ($32 million after-tax) associated with the combined heat and power thermal generating plant and operation assets in Atlantic City.

*Impairment loss of $53 million ($32 million after-tax) associated with the combined heat and power thermal generating plant and operation assets in Atlantic City.