Washington, District of Columbia-based energy distributor Pepco Holdings Inc. (POM - Analyst Report) posted third quarter 2011 operating earnings of 35 cents per share, missing the Zacks Consensus Estimate of 41 cents and the year-ago operating earnings of 52 cents.

The third quarter miss mainly stemmed from higher operation and maintenance expense in the company’s Power Delivery segment, due to increased electric system preventative maintenance and increased tree trimming activities.

Total Revenue

Pepco’s total revenue in the quarter was $1.643 billion, down 20.5% from $2.067 billion in the year-ago period. The year-over-year decline was primarily due to lower contribution from Pepco Energy Service and Power Delivery Services. The company’s third quarter also failed to match the Zacks Consensus Estimate of $2.006 billion.

Quarterly Highlights

Pepco’s overall operating expenses in the quarter totaled $1.4 billion against $1.9 billion spent in the year-ago period. A decline in fuel and purchase energy costs in the quarter mainly pulled down overall costs, while other costs including operations and maintenance expense and Depreciation and amortization continued to rise.

However, the company’s improved operating costs could not cause operating profits to rise compared to the previous year quarter. Third quarter operating income at Pepco was $195 million versus $212 million in the prior-year quarter.

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

During the quarter, Pepco made significant progress on executing its strategic plan at its Power Delivery segment, which includes efforts to improve system reliability and customer service. The company continued to modernize its electric system by installing advanced technologies, with smart meters deployment essentially complete in Delaware and in progress for the District of Columbia and Maryland customers.

These smart meter installations help Pepco to spot the location of individual power outages, making restoration efforts more efficient.

Financial Update

Cash and cash equivalents, including restricted cash, were $103 million as of September 30, 2011, higher than $20 million as of December 31, 2010. Long-term debts at quarter-end totaled $3,794 million versus $3,629 million as of December 31, 2010.

Guidance

Pepco Holdings narrowed its 2011 earnings per share guidance range to $1.15 to $1.25 from $1.10 to $1.25 previously. The guidance excludes the impact of discontinued operations and assumes normal weather for the remainder of the year.

Peer Comparison

In the energy products and services niche, the company competes with FirstEnergy Corp. (FE - Analyst Report). The latter announced third quarter operating earnings of $1.34 per share surpassing the Zacks Consensus Estimate of $1.23 and the year-ago earnings of $1.28.

FirstEnergy generated total revenue of $4,719 million in the third quarter versus $3,728 million in the year-ago quarter, reflecting a growth of 26.6%. Revenues generated by the company however fell short of the Zacks Consensus Estimate of $5,342 million.

Our View

Though the company’s third quarter results missed our expectations, we are impressed by the company’s smart meter installation program. We believe the completion of the installations will improve the company’s reliability and service to customers, thus, benefitting its bottom line results.

Pepco Holdings currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long term Outperform’ rating on Pepco shares.