Exhibit 99.5
Unaudited Pro Forma Condensed Consolidated Financial Information
Unaudited Pro Forma Condensed Consolidated Financial Information of Pepco Holdings, Inc. as of June 30, 2010, and for the six months ended June 30, 2010
On July 1, 2010, Pepco Holdings, Inc (PHI) completed the sale of its Conectiv Energy wholesale power generation business to Calpine Corporation (Calpine). Under the terms of the Purchase Agreement, dated April 20, 2010, the $1.65 billion sale price was subject to several adjustments, including a $49 million payment for the estimated value of the fuel inventory at the time of the closing and a $60 million reduction in the closing payment attributable to lower capital expenditures incurred by PHI than was anticipated at the time of execution of the Purchase Agreement for the Delta Project during the period from January 1, 2010 through the date of the closing. After giving effect to these and other adjustments, PHI received proceeds at the closing in the amount of approximately $1.63 billion (subject to possible post-closing adjustments).
The sale of the wholesale generation business to Calpine is part of a plan approved by the Board of Directors on April 20, 2010, for the disposition of PHI’s Conectiv Energy segment. The plan also includes the liquidation, within the succeeding twelve months, of all of Conectiv Energy’s load service supply contracts, energy hedging portfolio, certain tolling agreements and other assets not included in the sale to Calpine. As a result of the adoption of the plan of disposition, PHI reported the results of operations of the former Conectiv Energy segment as a discontinued operation for all periods presented in the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 included in PHI’s Form 10-Q filed on August 6, 2010.
The following unaudited pro forma condensed consolidated financial statements are presented for PHI to illustrate the effects solely of the sale of the Conectiv Energy wholesale generation business to Calpine and the use of the net proceeds to pay transaction costs and related income taxes and to retire outstanding debt. These unaudited pro forma condensed consolidated financial statements do not reflect any adjustments for the liquidation of the business operations not included in the sale to Calpine. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 illustrates the estimated effects of the sale to Calpine as if the transaction had occurred on June 30, 2010. The unaudited pro forma condensed consolidated statement of income from continuing operations for the six months ended June 30, 2010 illustrates the estimated effects of the sale as if the transaction had occurred at the beginning of the period. The pro forma adjustments and assumptions are described in the accompanying notes to the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements have been prepared using assumptions and estimates that PHI believes are reasonable under the circumstances and are intended for informational purposes only. They are not necessarily indicative of the financial results that would have occurred if the transactions described herein had taken place on the dates indicated, nor are they indicative of the future consolidated results of PHI. However, management believes that the estimates and assumptions used provide a reasonable basis for presenting the significant effects of the sale of its Conectiv Energy wholesale power generation business. Management also believes the pro forma adjustments give appropriate effect to the estimates and assumptions and are applied in conformity with accounting principles generally accepted in the United States of America.
The following unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 and the unaudited pro forma condensed consolidated statement of income from continuing operations for the six months ended June 30, 2010 should be read in conjunction with (i) the historical financial statements of PHI for the six months ended June 30, 2010 (unaudited) filed with the Securities and Exchange Commission (SEC) on Form 10-Q on August 6, 2010 and (ii) the historical financial statements of PHI for the years ended December 31, 2009, 2008 and 2007 originally filed with the SEC on Form 10-K on February 26, 2010, as revised in Exhibit 99.3 of this Form 8-K.
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PEPCO HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FROM CONTINUING OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010
| As Reported | Pro Forma Adjustments (Note 2) | Pro Forma, as Adjusted | ||||||||||
| (millions of dollars, except per share data) | ||||||||||||
Operating Revenue | ||||||||||||
Power Delivery | $ | 2,411 | $ | — | $ | 2,411 | ||||||
Pepco Energy Services | 1,023 | — | 1,023 | |||||||||
Other | 21 | — | 21 | |||||||||
Total Operating Revenue | 3,455 | — | 3,455 | |||||||||
Operating Expenses | ||||||||||||
Fuel and purchased energy | 2,377 | — | 2,377 | |||||||||
Other services cost of sales | 47 | — | 47 | |||||||||
Other operation and maintenance | 410 | — | 410 | |||||||||
Depreciation and amortization | 182 | — | 182 | |||||||||
Other taxes | 197 | — | 197 | |||||||||
Deferred electric service costs | (82 | ) | — | (82 | ) | |||||||
Total Operating Expenses | 3,131 | — | 3,131 | |||||||||
Operating Income | 324 | — | 324 | |||||||||
Other Income (Expenses) | ||||||||||||
Interest expense | (172 | ) | 38 | (a) | (134 | ) | ||||||
Gain (loss) from equity investments | (1 | ) | — | (1 | ) | |||||||
Other income | 11 | — | 11 | |||||||||
Total Other Expenses | (162 | ) | 38 | (124 | ) | |||||||
Income from Continuing Operations Before Income Tax Expense | 162 | 38 | 200 | |||||||||
Income Tax Expense related to Continuing Operations | 58 | 15 | (b) | 73 | ||||||||
Net Income from Continuing Operations | $ | 104 | $ | 23 | $ | 127 | ||||||
Basic and Diluted Share Information | ||||||||||||
Weighted average shares outstanding (millions) | 223 | 223 | ||||||||||
Earnings per share of common stock from continuing operations | $ | .47 | $ | .57 | ||||||||
The accompanying Notes are an integral part of this Unaudited Pro Forma Condensed Consolidated Statement of Income from Continuing Operations.
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PEPCO HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2010
| As Reported | Pro Forma Adjustments (Note 2) | Pro Forma, as Adjusted | ||||||||||
| (millions of dollars) | ||||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 34 | $ | — | (c) | $ | 34 | |||||
Restricted cash equivalents | 9 | — | 9 | |||||||||
Accounts receivable, net | 1,034 | — | 1,034 | |||||||||
Inventories | 129 | — | 129 | |||||||||
Derivative assets | 30 | — | 30 | |||||||||
Prepayments of income taxes | 154 | — | 154 | |||||||||
Deferred income tax assets, net | 109 | — | 109 | |||||||||
Prepaid expenses and other | 84 | — | 84 | |||||||||
Conectiv Energy assets held for sale | 281 | (90 | )(c) | 191 | ||||||||
Total Current Assets | 1,864 | (90 | ) | 1,774 | ||||||||
INVESTMENTS AND OTHER ASSETS | ||||||||||||
Goodwill | 1,407 | — | 1,407 | |||||||||
Regulatory assets | 1,804 | — | 1,804 | |||||||||
Investment in finance leases held in trust | 1,396 | — | 1,396 | |||||||||
Income taxes receivable | 134 | — | 134 | |||||||||
Restricted cash equivalents | 3 | — | 3 | |||||||||
Assets and accrued interest related to uncertain tax positions | 14 | — | 14 | |||||||||
Derivative assets | 10 | — | 10 | |||||||||
Other | 193 | (3 | )(d) | 190 | ||||||||
Conectiv Energy assets held for sale | 19 | (1 | )(c) | 18 | ||||||||
Total Investments and Other Assets | 4,980 | (4 | ) | 4,976 | ||||||||
PROPERTY, PLANT AND EQUIPMENT | ||||||||||||
Property, plant and equipment | 11,745 | — | 11,745 | |||||||||
Accumulated depreciation | (4,303 | ) | — | (4,303 | ) | |||||||
Net Property, Plant and Equipment | 7,442 | — | 7,442 | |||||||||
Conectiv Energy assets held for sale | 1,587 | (1,582 | )(c) | 5 | ||||||||
Total Property, Plant and Equipment | 9,029 | (1,582 | ) | 7,447 | ||||||||
TOTAL ASSETS | $ | 15,873 | $ | (1,676 | ) | $ | 14,197 | |||||
The accompanying Notes are an integral part of this Unaudited Pro Forma Condensed Consolidated Balance Sheet.
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PEPCO HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2010
| As Reported | Pro Forma Adjustments (Note 2) | Pro Forma, as Adjusted | ||||||||
| (millions of dollars) | ||||||||||
LIABILITIES AND EQUITY | ||||||||||
CURRENT LIABILITIES | ||||||||||
Short-term debt | $ | 988 | $ | (388 | ) (d) | $ | 600 | |||
Current portion of long-term debt and project funding | 1,051 | — | 1,051 | |||||||
Accounts payable and accrued liabilities | 649 | — | 649 | |||||||
Capital lease obligations due within one year | 7 | — | 7 | |||||||
Taxes accrued | 99 | — | 99 | |||||||
Interest accrued | 68 | (22 | ) (d) | 46 | ||||||
Derivative liabilities | 73 | — | 73 | |||||||
Other | 302 | — | 302 | |||||||
Liabilities associated with Conectiv Energy assets held for sale | 164 | (46 | ) (c) | 118 | ||||||
Total Current Liabilities | 3,401 | (456 | ) | 2,945 | ||||||
DEFERRED CREDITS | ||||||||||
Regulatory liabilities | 536 | — | 536 | |||||||
Deferred income taxes, net | 2,604 | (198 | ) (d) | 2,406 | ||||||
Investment tax credits | 33 | — | 33 | |||||||
Pension benefit obligation | 283 | — | 283 | |||||||
Other postretirement benefit obligations | 416 | — | 416 | |||||||
Income taxes payable | 7 | — | 7 | |||||||
Liabilities and accrued interest related to uncertain tax positions | 94 | — | 94 | |||||||
Derivative liabilities | 41 | — | 41 | |||||||
Other | 156 | — | 156 | |||||||
Liabilities associated with Conectiv Energy assets held for sale | 23 | — | 23 | |||||||
Total Deferred Credits | 4,193 | (198 | ) | 3,995 | ||||||
LONG-TERM LIABILITIES | ||||||||||
Long-term debt | 3,595 | (944 | ) (d) | 2,651 | ||||||
Transition bonds issued by ACE Funding | 351 | — | 351 | |||||||
Long-term project funding | 16 | — | 16 | |||||||
Capital lease obligations | 89 | — | 89 | |||||||
Total Long-Term Liabilities | 4,051 | (944 | ) | 3,107 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||
EQUITY | 4,228 | (78 | ) (c)(d) | 4,150 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 15,873 | $ | (1,676 | ) | $ | 14,197 | |||
The accompanying Notes are an integral part of this Unaudited Pro Forma Condensed Consolidated Financial Balance Sheet.
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Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet and Statement of Income from Continuing Operations
(1) Basis of Presentation
On July 1, 2010, Pepco Holdings, Inc completed the sale of its Conectiv Energy wholesale power generation business to Calpine Corporation. Under the terms of the Purchase Agreement, dated April 20, 2010, the $1.65 billion sale price was subject to several adjustments, including a $49 million payment for the estimated value of the fuel inventory at the time of the closing and a $60 million reduction in the closing payment attributable to lower capital expenditures incurred by PHI than was anticipated at the time of execution of the Purchase Agreement for Conectiv Energy’s 565 megawatt combined cycle generating facility that is under construction (know as the Delta Project) during the period from January 1, 2010 through the date of the closing. After giving effect to these and other adjustments, PHI received proceeds in the amount of approximately $1.63 billion (subject to possible post-closing adjustments).
The sale of the wholesale power generation business to Calpine is part of a plan approved by the Board of Directors on April 20, 2010, for the disposition of PHI’s Conectiv Energy segment. The plan also includes the liquidation, within the succeeding twelve months, of all of Conectiv Energy’s load service supply contracts, energy hedging portfolio, certain tolling agreements and other assets not included in the Calpine sale. As a result of the adoption of the plan of disposition, PHI reported the results of operations of the former Conectiv Energy segment as a discontinued operation for all periods presented in the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 included in PHI’s Form 10-Q filed on August 6, 2010.
The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010, solely illustrates the estimated effect of the sale of the Conectiv Energy wholesale power generation business to Calpine, and the use of the proceeds to pay transaction costs and related income taxes and to retire outstanding debt, as if the transaction had occurred on June 30, 2010. The unaudited pro forma condensed consolidated statement of income from continuing operations for the six months ended June 30, 2010 illustrates the estimated effects of the sale of the wholesale power generation business to Calpine and the use of the proceeds as if the transaction had occurred at the beginning of the period. The pro forma adjustments and assumptions are described in Note 2 below.
The unaudited pro forma condensed consolidated financial statements do not reflect any adjustments for the liquidation of the business operations not included in the sale to Calpine. The estimated after-tax proceeds from the liquidation of these business operations would be used to retire additional short-term debt. The retirement of additional short-term debt and the related reduction in interest expense are not expected to be material in relation to the pro forma condensed consolidated financial information taken as a whole.
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(2) Pro Forma Adjustments and Assumptions
| (a) | Reflects reduction in interest expense related to the repayment of short-term debt and long-term debt as described in (d) below. |
| (b) | A combined federal and state income tax rate of 40% has been assumed for the purposes of these unaudited pro forma condensed consolidated financial statements. |
| (c) | Reflects the elimination of assets and liabilities included in the sale of PHI’s Conectiv Energy wholesale power generation business to Calpine. During the second quarter of 2010, PHI recorded an after-tax charge of $81 million related to the Calpine transaction. In addition, PHI currently expects additional after-tax charges related to the Calpine transaction of approximately $7 million in the third quarter of 2010, which has been reflected as a pro forma adjustment to Equity. |
| (d) | Reflects the retirement of outstanding short-term and long-term debt (including related discounts and deferred issuance costs), payments of accrued interest on short-term and long-term debt and payment of estimated income taxes, each resulting from the use of cash proceeds from the sale of the wholesale power generation business to Calpine. |
The after-tax debt extinguishment costs, representing an additional pro forma adjustment to Equity, were approximately $71 million, primarily representing the aggregate after-tax premiums paid to holders of the long-term debt in July 2010 in connection with the early retirement of that debt.
PHI used the net after-tax proceeds from the sale of its Conectiv Energy wholesale power generation business to reduce its short-term and long-term debt. The pro forma adjustments take into account the following:
| • | The repurchase on July 2, 2010, of $640 million in principal amount of 6.45% Senior Notes, at an aggregate purchase price of $713 million, plus accrued interest, pursuant to a cash tender offer commenced on June 21, 2010. |
| • | The redemption on July 8, 2010, of the $110 million balance of the outstanding 6.45% Senior Notes at an aggregate redemption price of $122 million, plus accrued interest. |
| • | The repurchase on July 20, 2010 of $129 million in principal amount of 6.125% Senior Notes due 2017 at an aggregate redemption price of $145 million, plus accrued interest, pursuant to a cash tender offer commenced on June 21, 2010. |
| • | The repurchase on July 20, 2010 of $65 in principal amount of 7.45% Senior Notes due 2032, at an aggregate redemption price of $78 million, plus accrued interest, pursuant to a cash tender offer commenced on June 21, 2010. |
| • | The repayment on July 1, 2010, of an outstanding short-term debt balance in the amount of $450 million, plus accrued interest, under a Credit Agreement entered into on April 20, 2010. |
| • | An increase in short-term debt borrowings in the amount of $62 million to contribute toward the funding of expected income tax payments related to the sale and premium payments incurred in connection with the long-term debt retirements as described above. |
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