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Pepco Holdings Strengthens Infrastructure, Merger on Course

Zacks Equity Research

On Dec 4, we issued an updated research report on Pepco Holdings, Inc. (POM). The company has declared plans to strengthen the infrastructure of its primary operating segment, Pepco Delivery, through systematic capital expenditure over the next five years. However, its increasing debt level and carbon regulations could act as headwinds.

Pepco Holdings’ third quarter adjusted earnings of 46 cents per share surpassed the Zacks Consensus Estimate of 42 cents by 9.5%. However, third-quarter total revenues of $1.3 billion lagged the Zacks Consensus Estimate by 2.5%.  Like other utilities, mild summer temperatures in its service territories impacted electric sales.

Pepco Holdings is progressing on its merger with Exelon Corporation, which is expected to close in the second or third quarter of 2015. The proposed merger has already received permission from the shareholders of both the companies and from some regulatory commissions. It also received the go-ahead from the Federal Energy Regulatory Commission. The merger will create a large mid-Atlantic electric and gas utility.

The company has announced plans to strengthen Pepco Delivery by investing $6.6 billion over the next five years. Overall, these systematic capital investments will increase the reliability of its services. The company plans to fund its capital expenditures through internally generated cash and external financing.

Like any other utility Pepco Holdings also needs to comply with certain regulations. With environmental regulations getting stricter by the day, the necessary compliance will lead to higher operating costs and compress margins.

Moreover, the rising debt level of the company is a concern. Pepco Holding’ ability to fulfill debt obligations depends on the performance of its regulated and competitive operating subsidiaries. An inability to service its debts will severely dent the credit worthiness of the company.

Pepco Holdings currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the space include Black Hills Corporation (BKH), PG&E Corporation (PCG) and ALLETE, Inc. (ALE). Black Hills Corporation and PG&E Corporation sport a Zacks Rank#1(Strong Buy) while ALLETE has a Zacks Rank #2 (Buy).
 

Read the Full Research Report on POM
Read the Full Research Report on PCG
Read the Full Research Report on BKH
Read the Full Research Report on ALE


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