Pepco : Reports Fourth Quarter and Full Year 2014 Financial Results

Pepco Holdings, Inc. (NYSE: POM) today reported fourth quarter and full year 2014 earnings from continuing operations as follows:

“2014 was a year of significant accomplishments as we continued to see appreciable improvements in both reliability and customer satisfaction. Our financial and operating results reflect the positive impact of our investments in the electric system across our jurisdictions,” said Joseph M. Rigby, Chairman, President and Chief Executive Officer. “During the fourth quarter of 2014, approval for the pending merger with Exelon was received from the Federal Energy Regulatory Commission and the Hart-Scott-Rodino waiting period expired.” Rigby added, “This month a settlement agreement in connection with the merger was filed with the Delaware Public Service Commission, and regulatory approval was received from the Board of Public Utilities in New Jersey. We are pleased with our progress to date and work continues with Exelon on obtaining the remaining state regulatory approvals. Looking ahead, we remain confident that our pending merger with Exelon will provide significant stakeholder benefits, including enhancing our ability to achieve our fundamental strategy of providing our customers with safe and reliable service.”

In 2014, Pepco Holdings’ GAAP net income from continuing operations was $242 million, or 96 cents per share, as compared to $110 million, or 45 cents per share in the prior year. Excluding items that we believe are not representative of ongoing business operations, 2014 adjusted net income from continuing operations would have been $321 million, or $1.27 per share, as compared to $280 million, or $1.14 per share in the prior year.

The primary drivers of the increase in adjusted net income from continuing operations (Non-GAAP) for 2014, as compared to 2013, were higher electric distribution and transmission revenue (primarily due to higher rates from continued infrastructure investment and growth in the number of distribution customers), partially offset by higher depreciation expense and higher operation and maintenance expense.

Pepco Holdings’ GAAP net income from continuing operations for the three months ended December 31, 2014 was $35 million, or 14 cents per share, as compared to $58 million, or 23 cents per share, for the same quarter in the prior year. Excluding items that we believe are not representative of ongoing business operations, adjusted net income from continuing operations for the fourth quarter of 2014 would have been $59 million, or 23 cents per share, as compared to $61 million, or 24 cents per share, in the fourth quarter of 2013.

The decrease in adjusted net income from continuing operations (Non-GAAP) in the fourth quarter of 2014, as compared to the 2013 fourth quarter, was due to higher operation and maintenance expense and higher depreciation expense, partially offset by higher electric distribution revenue (primarily due to higher rates from continued infrastructure investment) and favorable income tax adjustments.

Due to the pending merger with Exelon, Pepco Holdings will not be providing earnings guidance for 2015.

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 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 composite income tax rates of 35 to 41 percent. Most merger-related costs are not tax deductible.

Discontinued Operations

Due to the early termination of Pepco Holdings’ cross-border energy lease investments during 2013, these investments are accounted for as discontinued operations and are no longer reported as a separate segment for financial reporting purposes.

In 2013, Pepco Energy Services completed a previously announced wind-down of its retail energy supply component. As a result, the operations of PES’ retail electric and natural gas supply businesses are accounted for as discontinued operations and are no longer a part of the PES segment for financial reporting purposes.

For the year ended December 31, 2014, there was no activity in discontinued operations, compared to a net loss of $1.31 per share for 2013.

Recent Events

Pepco Holdings – Exelon Merger

On November 20, 2014, the Federal Energy Regulatory Commission issued an order approving the planned merger with Exelon Corporation (Exelon) announced in April 2014. On December 22, 2014, the Hart-Scott-Rodino Act (HSR) waiting period expired, however, the Department of Justice has not advised Pepco Holdings or Exelon that it has concluded its investigation. The HSR Act no longer precludes the parties from closing the merger for a period of twelve months following the expiration of the waiting period. On February 11, 2015, a stipulation of settlement agreement related to the merger proceeding was approved by the New Jersey Board of Public Utilities. On February 13, 2015, a settlement agreement was filed with the Delaware Public Service Commission (DPSC). The agreement requires the approval of the DPSC. Applications for merger approval are pending with the District of Columbia Public Service Commission (DCPSC) and the Maryland Public Service Commission. The parties anticipate closing the transaction in the second or third quarter of 2015 following the receipt of the required approvals.

Operations

• Power Delivery electric sales were 47,215 gigawatt hours (GWh) for the full year 2014 compared to 47,497 GWh in the full year 2013. In the electric service territory, heating degree days increased by 4 percent and cooling degree days decreased by 6 percent for 2014 compared to 2013. Weather-adjusted electric sales were 47,108 GWh for the full year 2014 compared to 47,477 GWh for the full year 2013.
• Power Delivery electric sales were 10,996 GWh in the fourth quarter of 2014, compared to 11,085 GWh for the same period in 2013. In the electric service territory, heating degree days decreased by 7 percent for the three months ended December 31, 2014, compared to the same period in 2013. Weather-adjusted electric sales were 11,179 GWh in the fourth quarter of 2014, compared to 11,013 GWh for the same period in the prior year.
• For the quarter ended December 31, 2014, PES recorded an impairment loss of $28 million ($16 million after-tax) associated with its combined heat and power thermal generating facilities and operations in Atlantic City, as a result of significant adverse changes in the financial condition of its customers and business climate. PES impairment losses for the full year 2014 were $81 million ($48 million after-tax).
• During 2014, PES signed $43 million in energy efficiency contracts and $88 million in underground transmission construction contracts. PES signed $66 million in energy efficiency contracts and $111 million in underground transmission construction contracts for the same period in 2013.

Regulatory Matters

• On November 12, 2014, Pepco and the District of Columbia Department of Transportation received approval from the DCPSC for the triennial plan and related surcharge (filed in June 2014) for the District of Columbia power line undergrounding project. The legislation for the public-private partnership to underground up to 60 high-voltage lines became law on May 3, 2014. The DCPSC issued the order approving the financing plan on November 24, 2014. The order authorizes the District of Columbia to issue up to $375 million of bonds to fund the majority of its portion of the underground project and establishes a customer surcharge that will repay the cost of the bonds. The DCPSC orders are subject to a notice of appeal period which expires on April 3, 2015. If no appeals are filed, the District of Columbia will move forward on the financing plan, and the project is expected to begin in the second half of 2015.

Further details regarding changes in consolidated earnings between 2014 and 2013 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-K for the year ended December 31, 2014, 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 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.