Pepco Holdings Earnings Call NUGGETS: Sales Growth, Maryland Dialogue

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

Sales Growth

Paul Patterson – Glenrock Associates: First on sales growth, you guys expected to weather adjusted turn positive because of the employment growth did I hear that accurately, for the second half of this year.

A Closer Look: Pepco Holdings Inc Earnings Cheat Sheet>>

Frederick J. Boyle – SVP and CFO, Pepco Holdings, Inc.: This is Fred that’s correct.

Paul Patterson – Glenrock Associates: How much of much more can you quantify that a little bit or what’s the metric that we are actually looking at here in terms of the employment growth. Could you just outline this because for last 18 months, it’s been negative. I am just trying to get a sense as to what – how should we think about those?

Frederick J. Boyle – SVP and CFO, Pepco Holdings, Inc.: As far as in the Delmarva region we’re seeing some improvement, significant improvement in industrial activity there and there’s been job expansion in that area that we expect to continue in the second half of this year. Looking to New Jersey in the ACE area which had been very hard-hit through the recession from an employment perspective. We are seeing indications of strong growth there and we expect that to continue to second half, we are expected to really accelerate for the second half of this year. The Philadelphia Fed, South Jersey survey of small business confidence for example is now indicating that the confidence level is back to prerecession levels, which had been quite depressed in New Jersey. Similarly in the Mid-Atlantic region the manufacturer survey about 70% are now saying they are adding staff. So we’re seeing some positive signs there, which should help offset some of the residential where that’s been depressed really across the system.

Paul Patterson – Glenrock Associates: So it’s basically on industrial side, is that how we should think about this.

Frederick J. Boyle – SVP and CFO, Pepco Holdings, Inc.: On the commercial, in the New Jersey area with the casinos.

Paul Patterson – Glenrock Associates: Any sense as to how much?

Frederick J. Boyle – SVP and CFO, Pepco Holdings, Inc.: From a total system we had been targeting total growth of about 1.9% for 2012 and we’re now expecting on a weather-adjusted basis to be down for 2012 a little less than 0.5%.

Paul Patterson – Glenrock Associates: Okay. Now on the Slide 12 you guys mentioned the PES sort of changing – the market challenges. Could you elaborate a little bit more on that in terms of what you’re seeing there at PES?

John U. Huffman – President and CEO, Pepco Energy Services: This is John Huffman. Since the analyst conference in March, we’ve seen continued challenges in the state and local government markets, which is by far our biggest segments, and really the biggest driver really is the unwillingness or the caution that they are showing in terms of taking on new debt, which is associated with a third-party financing of our projects. So that – we’re continuing to see that. We’ve signed just $2 million of energy efficiency contracts through the first half of the year, and we’re just seeing fewer projects out there, so our pipeline hasn’t been replenished like we were expecting.

Paul Patterson – Glenrock Associates: So how is the outlook going forward on this business I guess?

John U. Huffman – President and CEO, Pepco Energy Services: Well, we’re evaluating that right now as part of our annual planning process, and as Joe mentioned, we’ll be providing a new outlook on the next earnings call.

Paul Patterson – Glenrock Associates: On the regulatory outlook here, I mean I’m not exactly clear. Maybe you can sort of give us a little bit more of a flavor here as to how you feel the sort of next set of rate cases is going to sort of do the trick here? It seems that they don’t – I don’t know, when I read these orders and what have you, and particularly Maryland, doesn’t look like they like the idea of RIM. Basically it looks they want to reliability but they don’t want to pay for it. That’s what I am reading it. Can you just give us a little bit more of flavors to how you outline this and if it doesn’t work out, Joe what then is the plan because the strategy seems to have been get reliability up, get customer satisfaction up and then better regulatory treatment et cetera? What happens in the situation if you repeatedly don’t get what you need?

Joseph M. Rigby – Chairman of the Board, President and CEO, Pepco Holdings, Inc.: Let me make couple comments, Paul because that is probably the question of the day and it’s probably have been that has had the most focus certainly over the last couple months and certainly over the last couple weeks. The basic premise that if you provided or you built it, they will be willing to pay is something that you have to believe in to be in this business. I think if you look at the, certainly if you look not only at the words, but even the tone of the recent Maryland order for Pepco, it’s really pretty harsh. I think our view and Tony can comment when I wrap up is that it would not appear to be the right path to continue to pursue the RIM if you will in the next Maryland case. They are pretty severely rejected that. I think in prior – I think at the analyst conference, we had kind of shown a menu of different alternatives that we can pursue and what kind of go down that menu, but I think that we also talked about kind of plan B which is just to go back and make more and more filings, as fast as we have to, we will. I think that we also don’t look at it that necessarily. Maryland is the whole story for PHI, it’s 25% I’ll say the revenue base. It’s obviously very important, but we do think that we’ll be able to make good decent headway in our other jurisdictions. One of the other things that we think about not surprising is, in parallel we have to continue to expand the dialogue with other key stakeholders. I wouldn’t rule out trying to take a legislative approach in the State of Maryland, I don’t think that that would necessarily deliver a benefit per se in this next round of cases, but that’s clearly something that we’re evaluating as we move forward. I think to get to the heart of your question is there a point where we just say, we’re not going to spend any more money in this jurisdiction if we don’t get a fair outcome. I just don’t want to, I don’t want to raise that issue right now. I would tell you that we are keenly aware that there is a point and, potentially that we have that we have to have a much more difficult conversation with or both our regulators and our legislative leaders, that this is just truly not sustainable and I don’t think we’re quite there yet. You know I think it’s important for us to maintain the progress that we’ve made it’s candidly, it’s disappointing to me, that when I look at the facts and the facts show significant improvement in reliability over the last two years when I look at the facts of the performance, not only in Hurricane Irene, but in this most recent storm we performed right in line, in some cases better than the other regional utilities and yet there seems to be just a very harsh tone taken towards Pepco. So I’m believing that the facts will eventually win out, I think there is a view that I hold – that if you continue to perform you’ll be able to work your way through this. There’s no question that we’re in a tough environment right now. I just don’t want – I don’t think it would be prudent to kind of draw a line in the sand at this point because of the progress that we’ve made, and I think that if we tried that option it probably would invite a reaction that we really don’t want at this point in time. I’m more heartened by expanding the dialogue, both in DC and Maryland, around undergrounding. If you kind of get to the most – where most of the criticism comes it’s after an enormous weather event, and if you just look at what causes that, it’s predominantly trees that are outside the right-of-way that are literally taking the infrastructure down, and the obvious solution there is how do you harden the system to prevent that. So I’m pleased that the Governor and the Mayor have initiated the conversations to kind of get to the core issue of what’s causing the most frustration, which is after major weather events. So a longwinded way to say that I think it’s more prudent for us to keep pace, but I do want you to know that we understand that there is a point in the future potentially where we have to have a much more difficult conversation.

Paul Patterson – Glenrock Associates: Okay. DC, you said the third quarter and I guess (looking) to your comments you are expecting something more constructive there. Do you have any idea when DC is going to act on this case?

Anthony J. Kamerick – EVP and CRO, Pepco Holdings, Inc.: Paul this is Tony. They do not have a statutory deadline. So we’re expecting in the third quarter, but it could be early fourth quarter also.

Paul Patterson – Glenrock Associates: Okay. And then just sort of following up, Joe, on this undergrounding thing, I mean, that sounds like a lot more CapEx. Is it safe to assume that you’d have to have some different kind of regulatory construct or some substantially better sense in terms of regulatory treatment of some sort before you really undertake something like that or as opposed to just sort of politician saying that Dave, so promising you something do (indiscernible) as opposed to…

Joseph M. Rigby – Chairman of the Board, President and CEO, Pepco Holdings, Inc.: Paul, let me tell you something. We would not outrun our headlights with proceeding with undergrounding without having a very fulsome discussion. There are many issues with undergrounding. People can talk about the cost, obviously that’s an enormous impact, but just given the logistics of pulling it off. It’s very technically feasible, it’s not technically beyond anything we can do, but the issues that surround that are not just related cost, but I think part of that dialogue as we kind of peel that onion back, it has to include a very clear path of recovery because we just could not proceed on something that’s significant. If you get a chance, take a look at the Shaw Group report that. I guess we did about four years ago in the district around the potential of undergrounding and these are enormous dollars, enormous monthly impacts to customers bill even if you stretch it out over 30 years, so there is — we need to have this dialogue that both the Governor and the Mayor have initiated. So, people kind of see this for what it really is. It’s possible. It would improve reliability following a major weather event, but it’s not without some very serious issues. We view this as more so a policy issue than anything else and that’s why we welcome the dialogue.

Anthony J. Kamerick – EVP and CRO, Pepco Holdings, Inc.: Paul, this is Tony I would just add one further thought. In the District of Columbia one of the proposals that was made, was that there would be a surcharge on customers’ bills to help pay for this and that’s the kind of thing we’d be looking for.

Maryland Dialogue

Dan Eggers – Credit Suisse: Paul covered a lot of these issues in detail, but I guess just kind of thinking, through Maryland a little bit more with the Governor’s Blue Ribbon Panel and the 60-day process have less than 60-days now to come up with some plans. How do you see the dialogue playing through and even if there are a series of suggestions as to executive or legislative actions. How quickly could those be implemented given the political calendar ahead and your planned rate case filings later on this year.

Joseph M. Rigby – Chairman of the Board, President and CEO, Pepco Holdings, Inc.: Well candidly we have raised our hand and said that we want to be, this is Joe by the way, we’ve raised our hand and said we obviously want to be a participant in this dialogue. We have not heard more back from the Governor’s energy advisor although we think that that’s just right on in the offing. I am not sure Dan, how much could be done in the upcoming legislative session. So you know I wouldn’t anticipate that you know as we make our filing later this year that it would necessarily kind of intersect with that effort, such that there would be legislative action. But that’s my own personal speculation at this point.

Dan Eggers – Credit Suisse: Joe I guess when you look at this rate case is going to come in the fourth quarter, based on what was said and done and not only kind of (NASDAQ:NINE) – any sort of forward-looking mechanisms but also the view that the Commission cannot reimburse you for real and natural cost because they don’t feel like they need to because you have access to capital. What do you think – what angles do you pursue in this case to try and get closer to what is an arguably still low ROE?

Joseph M. Rigby – Chairman of the Board, President and CEO, Pepco Holdings, Inc.: I’ll make a comment, but I would also invite Tony to do that. We’ve spent – obviously as you would imagine – we’ve spent a lot of time in the last couple weeks talking about this. I think the short of it is that we need to come in with a very straightforward case. The Commission has made it pretty clear they’re not interested in discussing RIM or a tracker. So we need to approach this I think in a way in which we don’t kind of distract the process with that. I think the point though is to get back in here as quickly as we possibly can and also to kind of keep the process as streamlined as we can. And with that Tony let me maybe ask you to maybe expand on that.

Anthony J. Kamerick – EVP and CRO, Pepco Holdings, Inc.: Okay. I don’t think I can expand a whole lot more. I think as Joe said earlier, our plan B has always been to just to keep filing rate cases every nine months, if that’s necessary, and that’s what we plan to do. And Joe also pointed out that we might put a few things in here that cannot that are not sort of surcharge mechanisms but some other proposals from the list that we have provided earlier. But I just think we keep pounding the rate case (to them).

Dan Eggers – Credit Suisse: I guess I understand the need to try and get the revenues up as quickly as possible, but it seems like there’s such a huge divergence in opinion between what you and the equity markets believe a utility should be allowed to return and what the commission believes that utility should be allowed to return. The hammering out the case process really work in Maryland or is there need to be you more time, more education and may be more of this blue ribbon panel pressured to try and get to a workable solution rather than go into this regular exercise that hasn’t yielded whole lot.

Joseph M. Rigby – Chairman of the Board, President and CEO, Pepco Holdings, Inc.: I think you’re kind of getting to one of the cores of the issue. Clearly the Commission makes these determinations, but also there is a path that we have followed in parallel which were actually very actively involved with right now, we had been but obviously we’re just going to be – we have to kind of double our efforts to dialogue with key decision-makers both at the state and the federal level to have them understand the implications of what’s happening to Pepco and also the disparity between the level of spend and the level of recovery so you could be assured that those conversations are taking place and will continue to take place. We have a very full calendar in front of us in terms our outreach. The need to educate is essential. We’re shifting our advertising from I’ll say the focus on reliability efforts to get even more basic fundamental about what it takes to maintain a grid and what it takes to restore when you have these major efforts, but we’re not Pollyannaish I think it’s clear that we’re going to have to work our way through this over the next several months. Certainly, over the next year as we work through the next case. But there is an extensive amount of outreach that’s already underway and will be continue that as we go into the future.