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Pepco Beats EPS, Cuts View

Zacks Equity Research

Pepco Holdings Inc. (POM) reported third quarter 2012 earnings from continuing operations of 47 cents per share, higher than the year-ago figure of 36 cents. Earnings were also higher than the Zacks Consensus Estimate of 42 cents.

The year-over-year growth in earnings was due to higher electric transmission and distribution revenue, lower expenses and early termination of one of the seven cross-border lease investments leading to an after-tax gain of $9 million.

Earnings per share, as per GAAP, were 49 cents versus 35 cents in the third quarter of 2011. The difference between GAAP and operating earnings during the reported quarter was due to a 2 cent mark-to-market gain on hedging activities.

Total Revenue

Total revenue at the end of the third quarter was $1.48 billion, down 10.4% from $1.64 billion in the year-ago period. The year-over-year decline was primarily due to lower contribution from the Pepco Energy Service segment.

Revenues also failed to match the Zacks Consensus Estimate of $1.64 billion.

Quarterly Highlights

Total operating expenses were $1.21 billion versus $1.45 billion in the year-ago period.  The decline stemmed from a 25.2% decrease in fuel and purchase energy costs.

Despite a 10.4% fall in total revenue in the reported quarter, savings on the cost front boosted the margins of the company. Operating income at Pepco increased to $264 million in third quarter 2012 from $195 million in the prior-year quarter

Interest expenses at third quarter end were $68 million versus $64 million at the end of the year-earlier period.

Financial Update

Cash and cash equivalents, including restricted cash, were $128 million as of September 30, 2012, up from $120 million as of December 31, 2011.

Long-term debts as of September 30, 2012 were $4,100 million versus $3,794 million as of December 31, 2011.

Pepco Holdings trimmed the top end of its earnings guidance for 2012. The new expectation for the full year 2012 is in the range of $1.15 to $1.25 per share, down from an earlier range of $1.15 to $1.30 per share. The guidance excludes the impact of discontinued operations and assumes normal weather during the year. It also excludes restoration cost following Hurricane Sandy.

Peer Comparison

Another company operating in the same niche is NiSource Inc. (NI). The company posted third-quarter 2012 pro forma earnings per share of 5 cents, beating the Zacks Consensus Estimate by a penny. Quarterly earnings were lower than the year-ago figure of 11 cents per share due to increase in operating as well as interest expenses.

Total revenue in the quarter under review declined to $961.9 million from $1,023.8 million in the year-ago quarter. Reported revenue lagged the Zacks Consensus Estimate of $1,076.0 million.

Our View

The company has been impacted by storms twice during the year and intends to recover system restoration costs through distribution rate base cases. We believe the restoration costs will to an extent impact the operating results of the company.

Pepco’s decision to spend $5.9 billion in the course of next five years to improve its operation, by improving system reliability, enhancing customer service, and installing advanced technologies, is appreciable.

In the near term we do not locate any positive catalyst which can benefit the results significantly. Besides, there is always a degree of uncertainty involved in the outcomes of the rate cases. Given these factors, the stock currently retains a short-term Zacks #3 Rank (Hold rating).

Based in Washington, District of Columbia, Pepco Holdings, through its two operating divisions, Power Delivery and Competitive Energy, engages in transmission and distribution of electricity, as well as delivery and supply of natural gas.  With a market capitalization of $4.49 billion, the company has 5,104 full time employees.

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