We have downgraded our recommendation on Pepco Holding Inc. (POM) to Neutral from Outperform, as we felt the delay in the service date of Mid-Atlantic Power Pathway (MAPP) transmission project will impact the company’s earnings.
Pepco Holding has gradually transformed itself into a regulated utility by divesting its unregulated businesses. It has a stable customer base, spread across commercial, residential and government customers. Besides, the company is also making investment on infrastructure to develop its transmission systems and provide better services to its consumers.
However, like other regulated utility companies, Pepco is also subject to regulation by various federal, state and local regulatory agencies, which could significantly impact operations. Inconsistent weather patterns have of late impacted the Power Delivery and retail energy supply businesses to a great extent.
The utility companies make capital investments to improve and upgrade its transmission and distribution systems, to ensure uninterrupted supply of power to its customers. The regulated companies recover the investment through rate increase filing. Presently, Pepco Holdings has five pending electrical regulatory rate cases. Any unfavorable outcome in the rate cases could hurt the prospects of the company and its ability to carry on with developmental expenditures.
Pepco failed to meet our top-line expectation in the first quarter of 2012 due to lower contribution from all the three operating segments of the company. Pepco expects earnings per share for 2012 to be in the band of $1.15 to $1.30. The guidance assumes normal weather pattern for rest of the year, which remains dubious.
Pepco Holdings currently retains a Zacks #3 Rank (short-term Hold rating). Another utility operator in the region American Electric Power Co., Inc. (AEP) presently retains a Zacks #4 Rank, which translates into a short-term Sell rating.
Based in Washington, District of Columbia, Pepco Holdings, through its two operating divisions, Power Deliver and Competitive Energy, involves in transmission and distribution of electricity, as well as delivery and supply of natural gas.
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