Pepco Sells Conectiv Energy

Pepco Holdings Inc. (POM) exited its competitive energy business - Conectiv Energy, selling all of its generation assets in the Pennsylvania-New Jersey-Maryland (PJM) market, to Calpine Corporation for $1.63 billion.

The sale includes Conectiv’s electric generation business across five Mid-Atlantic states, consisting of 18 power plants in Delaware, Maryland, Virginia, and southern New Jersey, and a natural gas facility in Pennsylvania, which is under construction. Calpine expects the work at the Pennsylvania facility to be over by 2011. These assets represent a total generating capacity of 4,490 megawatts (MW).

Pepco on Conectiv’s Sale

The sale of Conectiv Energy repositions Pepco Holdings as a regulated transmission and distribution company. The company plans to use the proceeds from the sale and the liquidation of the remaining contracts to reduce its debt.

Pepco’s management believes exiting Conectiv’s business should assure steadier profits with the company’s exposure to the energy commodity markets narrowing. Furthermore, Pepco believes that the sale would lower the company’s capital and collateral requirements, strengthening its credit profile.

Following the completion of the sale, Standard & Poor's raised its investment grade rating on Pepco's credit to "BBB+" from "BBB", removing Pepco from CreditWatch.

Calpine Welcomes Conectiv

The purchase of Conectiv’s generation business strengthens Calpine’s hold in the PJM market, one of the nation’s most competitive power markets. This is an important strategic milestone for Calpine. Calpine plans to set up a regional headquarter in Wilmington, Delaware, appointing nearly 200 employees of Conectiv Energy, located primarily at plant sites and engaged in engineering and other support functions.

Our Take

We view the sale of Pepco’s Conectiv Energy business as a major positive for the company. Going forward, we expect to see an improvement in the company’s business risk profile, positioning it for growth in the long-term.

Currently, we maintain our Underperform recommendation on the Zacks Rank #5 (Strong Sell) stock.

Read the full analyst report on POM