Income Taxes

3 Months Ended

Mar. 31, 2015

Income Taxes

(10) INCOME TAXES

A reconciliation of PHI’s consolidated effective income tax rates from continuing operations is as follows:

	Three Months Ended March 31,
	2015					2014
	(millions of dollars)
Income tax at Federal statutory rate	$	29		35.0	%	$	42		35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		6		7.2	%		7		5.8	%
Asset removal costs		(3	)	(3.6	)%		(2	)	(1.7	)%
Change in estimates and interest related to uncertain and effectively settled tax positions		—		—			(1	)	(0.8	)%
Energy efficiency-related tax deductions		(4	)	(4.8	)%		—		—
Merger-related costs		2		2.4	%		—		—
Other, net		—		(0.1	)%		—		(0.3	)%
Consolidated income tax expense	$	30		36.1	%	$	46		38.0	%

PHI’s consolidated effective tax rates for the three months ended March 31, 2015 and 2014 were 36.1% and 38.0%, respectively.

In the first quarter of 2015, PHI recorded a tax benefit of $4 million related to certain energy efficiency tax deductions associated with Pepco Energy Services’ energy savings performance contracting services.

In connection with the proposed Merger (as further described in Note (1), “Organization”), PHI incurred certain merger-related costs in the first quarter of 2015, which costs are not tax-deductible.

Changes to the District of Columbia Tax Law

On February 26, 2015, the District of Columbia Fiscal Year 2015 Budget Support Act of 2014 became law, effective January 1, 2015. The law revised the apportionment methodology for corporate tax and included a phase-down of the corporate tax rate from 9.975% to 8.25% by fiscal year 2019. The change in law required PHI and Pepco to remeasure their net deferred tax liabilities in the first quarter of 2015. This remeasurement resulted in Pepco reducing its deferred tax liabilities by $23 million in the first quarter of 2015 to reflect the initial reduction in the tax rate from 9.975% to 9.4% for 2015. This reduction to the deferred tax liabilities was offset by a corresponding decrease to Pepco’s regulatory assets. Further reductions to the corporate tax rate beyond 2015 will depend upon future revenue projections for the District of Columbia.

Potomac Electric Power Co [Member]

Income Taxes

(9) INCOME TAXES

A reconciliation of Pepco’s effective income tax rates is as follows:

	Three Months Ended March 31,
	2015					2014
	(millions of dollars)
Income tax at Federal statutory rate	$	13		35.0	%	$	17		35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		2		5.3	%		3		6.3	%
Asset removal costs		(3	)	(7.9	)%		(2	)	(4.2	)%
Change in estimates and interest related to uncertain and effectively settled tax positions		—		—			(1	)	(2.1	)%
Other, net		—		(0.8	)%		(1	)	(1.7	)%
Income tax expense	$	12		31.6	%	$	16		33.3	%

Pepco’s effective tax rates for the three months ended March 31, 2015 and 2014 and were 31.6% and 33.3%, respectively.

Changes to the District of Columbia Tax Law

On February 26, 2015, the District of Columbia Fiscal Year 2015 Budget Support Act of 2014 became law, effective January 1, 2015. The law revised the apportionment methodology for corporate tax and included a phase-down of the corporate tax rate from 9.975% to 8.25% by fiscal year 2019. The change in law required Pepco to remeasure its net deferred tax liabilities in the first quarter of 2015. This remeasurement resulted in Pepco reducing its deferred tax liabilities by $23 million in the first quarter of 2015 to reflect the initial reduction in the tax rate from 9.975% to 9.4% for 2015. This reduction to the deferred tax liabilities was offset by a corresponding decrease to Pepco’s regulatory assets. Further reductions to the corporate tax rate beyond 2015 will depend upon future revenue projections for the District of Columbia.

Delmarva Power & Light Co/De [Member]

Income Taxes

(10) INCOME TAXES

A reconciliation of DPL’s effective income tax rates is as follows:

	Three Months Ended March 31,
	2015					2014
	(millions of dollars)
Income tax at Federal statutory rate	$	19		35.0	%	$	22	35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		3		5.7	%		3	4.8	%
Other, net		(1	)	(1.1	)%		—	0.5	%
Income tax expense	$	21		39.6	%	$	25	40.3	%

DPL’s effective tax rates for the three months ended March 31, 2015 and 2014 were 39.6% and 40.3%, respectively.

Atlantic City Electric Co [Member]

Income Taxes

(9) INCOME TAXES

A reconciliation of ACE’s consolidated effective income tax rates is as follows:

	Three Months Ended March 31,
	2015				2014
	(millions of dollars)
Income tax at Federal statutory rate	$	2	35.0	%	$	6	35.0	%
Increases (decreases) resulting from:
Other, net		—	(1.7	)%		—	2.5	%
Consolidated income tax expense	$	2	33.3	%	$	6	37.5	%

ACE’s consolidated effective tax rates for the three months ended March 31, 2015 and 2014 were 33.3% and 37.5%, respectively.