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On Aug 22, we upgraded the energy delivery company, Pepco Holdings Inc. (POM - Analyst Report) to Neutral based on favorable year-over-year earnings results in the reported quarter, backed by effective cost control initiatives and acceleration in distribution operation. Pepco Holdings currently has a Zacks Rank #3 (Hold).

Why the Upgrade?

Pepco Holdings has gradually transformed itself into a regulated utility and generates the majority of its earnings through its core regulated electricity and natural gas operations. Its strong customer base also provides stability to its revenue stream.

The investments made by Pepco Holdings in its infrastructure are already yielding positive results. System reliability has improved from the prior year and has led to enhanced customer satisfaction. Additionally, the ongoing smart meter installation will benefit customers by quick detection of outages and prompt restoration, fewer estimated bills and more information regarding energy usage.

During the second quarter, the company lowered its debt level through the proceeds from the liquidation of ease investments. In addition, Pepco Holdings enhanced its credit facility for another year. These activities helped strengthen its balance sheet and liquidity position.

Moreover, Pepco Holdings shares attract income seeking investors as it pays a relatively stable and secure dividend. Pepco currently pays an annual dividend of $1.08 per share, which reflects a yield of 5.7%, higher than the industry average of 2.1%.

Pepco Holdings has planned investments of $5.9 billion in its electric system over the next five years. However, if Pepco fails to receive favorable regulatory decisions in its pending rate cases, it will find it difficult to recover the costs and sustain systematic development work.

Other Stocks to Consider

Other electric utilities that are currently performing well include Huaneng Power International, Inc. (HNP - Snapshot Report), Alliant Energy Corporation (LNT - Snapshot Report) and IdaCorp, Inc. (IDA - Snapshot Report). Huaneng Power currently has a Zacks Rank #1 (Strong Buy) while Alliant Energy and IdaCorp, Inc. carry a Zacks Rank #2 (Buy).


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