PEPCO HOLDINGS LLC Annual Report - Your Investment Snapshot

Welcome to your straightforward guide to PEPCO HOLDINGS LLC's latest annual performance. We've cut through the jargon to give you essential insights into what this company does, how it performed this past year, and what it means for its future.

Here's a concise overview:

1. Business Overview

PEPCO Holdings LLC is a leading utility holding company that operates regulated electric and natural gas transmission and distribution businesses. Through its subsidiaries, including Pepco, Delmarva Power, and Atlantic City Electric, the company delivers reliable energy to approximately 2.2 million electric customers and 135,000 natural gas customers across Washington D.C., Maryland, Delaware, and parts of New Jersey. Its core business focuses on safely and reliably delivering energy, maintaining infrastructure, and investing in grid modernization.

2. Financial Performance

For the fiscal year ending December 31, 2023, PEPCO Holdings LLC achieved total operating revenues of approximately $8.5 billion, a 4% increase from the previous year. This growth primarily stemmed from successful rate adjustments and customer growth across its service territories. Net income reached $720 million, a 6% improvement year-over-year, thanks to effective cost management and higher allowed returns on invested capital. Capital expenditures for the year totaled $2.1 billion, highlighting substantial investments in infrastructure upgrades and reliability projects to maintain and improve service.

3. Risk Factors

Investors should be aware of potential risks that could impact the company's financial condition and operational results. These include:

• Regulatory Risks: Adverse regulatory decisions, such as unfavorable rate case outcomes, disallowances of capital expenditures, or changes in regulatory policy, may hinder the company's ability to recover costs and earn an adequate return on investment.
• Interest Rate Risk: Rising interest rates could increase the company's borrowing costs, affecting profitability and the ability to finance capital projects.
• Operational and Environmental Risks: Severe weather events, natural disasters, or other climate change impacts may damage infrastructure, raise restoration costs, and disrupt service. Evolving environmental regulations could demand substantial capital for compliance.
• Cybersecurity Risks: The increasing sophistication of cyberattacks threatens critical infrastructure, operational technology, and customer data, potentially causing service disruptions, financial losses, and reputational damage.
• Supply Chain Risks: Disruptions in the global supply chain for critical equipment and materials could delay infrastructure projects and increase costs.
• Economic Conditions: General economic downturns, inflationary pressures that increase operational and maintenance costs, and changes in energy demand could affect customer affordability and the company's financial performance.

4. Management Discussion and Analysis (MD&A)

Results of Operations: The company achieved stable operational performance in 2023. The 4% increase in operating revenues primarily resulted from successful rate adjustments and modest customer growth. Net income improved by 6%, stemming from these revenue increases combined with effective cost management initiatives and favorable regulatory outcomes allowing for higher returns on invested capital.

Key achievements included successfully implementing several grid modernization projects, which improved service reliability by 15% in critical areas. The company also secured favorable outcomes in rate cases across multiple jurisdictions, providing the necessary framework for continued infrastructure investment and cost recovery. Efforts to integrate renewable energy sources and enhance customer digital platforms also advanced.

However, the company faced ongoing challenges, including inflationary pressures increasing operational and maintenance costs, as well as supply chain disruptions for critical equipment, requiring proactive management to avoid project delays. Extreme weather events in the service territories caused increased restoration costs and temporary service interruptions, though the company's response times were generally strong. Regulatory scrutiny on environmental compliance and customer affordability remained a constant focus, demanding continuous engagement with regulatory bodies.

Liquidity and Capital Resources: PEPCO Holdings LLC maintains a solid financial position, supported by its regulated asset base and predictable cash flows. As of year-end 2023, the company held $350 million in cash and cash equivalents and maintained access to $2.0 billion in undrawn credit facilities, ensuring ample liquidity for operational needs and planned capital expenditures. Total long-term debt was approximately $12.5 billion, with a manageable debt-to-capitalization ratio of 55%.

The company's ability to generate cash from operations, coupled with access to capital markets, supports its significant capital investment program. This includes $2.1 billion spent in 2023 and a projected $2.3 billion for 2024, primarily funding grid modernization, reliability enhancements, and clean energy integration. Stable credit ratings reflect the company's financial strength and its ability to access capital on favorable terms.

Strategic Focus and Market/Regulatory Environment: The company continued to advance its "Path to a Clean Energy Future" strategy, which emphasizes grid resilience, decarbonization, and customer-centric innovation. This strategy responds to significant market trends, including the accelerating transition to clean energy, the need for stronger grid resilience against climate change impacts, and the increasing demand for distributed energy resources. Regulatory bodies are increasingly focused on performance-based ratemaking, energy efficiency programs, and ensuring equitable access to clean energy. These trends and regulatory priorities guide the company's investment decisions and operational strategies, reinforcing its commitment to sustainability and service excellence. The company reaffirmed its commitment to diversity and inclusion initiatives across its operations and workforce development programs.

5. Future Outlook

PEPCO Holdings LLC plans to invest approximately $2.3 billion in 2024, primarily for grid modernization, reliability enhancements, and clean energy integration initiatives. The company expects stable earnings growth, driven by its regulated rate base, ongoing efforts to manage costs, and continuous improvements in operational efficiency. The company remains committed to achieving its sustainability targets, including reducing greenhouse gas emissions and enhancing energy efficiency programs across its service territories. Its strategic focus will continue to deliver safe, reliable, and affordable energy while advancing its clean energy transition goals, aligning with evolving regulatory and market demands.

6. Competitive Position

As a regulated utility holding company, PEPCO Holdings LLC operates in largely monopolistic service territories. It provides essential electric and gas services with limited direct competition for end-use customers. Its competitive advantage comes from its established infrastructure, extensive transmission and distribution networks, experienced workforce, and strong, long-standing regulatory relationships. The company benefits as part of the larger Exelon Corporation family. It leverages shared resources, expertise, and best practices from Exelon Corporation in areas like innovation, technology, and sustainability, enhancing its operational capabilities and market position.