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On Jun 7, we reiterated our Underperform recommendation on energy company Pepco Holdings Inc. (POM - Analyst Report). The company currently has a Zacks Rank #4 (Sell).

Why the Reiteration?

Pepco Holdings’ adjusted earnings of 24 cents per share in the first quarter 2013 were lower than the Zacks Consensus Estimate by 4.0%. The company registered negative earnings surprises in 3 of the last 4 quarters, with an average negative surprise of 4.74%. Revenues in the first quarter were down 31.4% from the year-ago period to $0.85 billion and were also lower than the Zacks Consensus Estimate of $1.32 billion.

Pepco has planned investments worth $5.9 billion in its electric system over the next 5 years. Pepco depends on timely constructive regulatory decisions to earn an adequate return on its capital investments.

The rate case outcomes in 2012 were not favorable. The company had six rate cases pending at the end of the first quarter 2013. If the same trend continues this year, Pepco will find it difficult to recover the costs and sustain systematic development work.

Pepco’s regulated utility businesses are subject to regulation by various federal, state and local regulatory agencies, which could significantly impact operations. The compliance with new or stricter regulatory developments in its service territories will increase the operating costs of the company and impact margins.

As a part of the interstate power transmission grid, the company is also dependent on the transmission facilities of other owners. Due to the interconnected nature of the grid, any outage at neighboring utilities could impact Pepco’s operations and result in service interruption. Since the company has no control over the operations of other utilities, any such incident could have a negative impact on Pepco’s business and financial condition.   

In addition, despite a marginal increase in customer count in the reported quarter, the decline in kilowatt hour sales remains a cause of concern.

Other Company Release

In the latest quarterly releases, ALLETE Inc. (ALE - Snapshot Report), DTE Energy Company (DTE - Analyst Report) and El Paso Electric Co. (EE - Snapshot Report) surpassed the respective Zacks Consensus Estimate by 10.67%, 30.10% and 72.73%. All these companies presently carry a Zacks Rank #2 (Buy).

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