Pepco Plans Capital Restructuring

Pepco Holdings, Inc. ( POM - Analyst Report ) announced its plan to offer up to 15,584,415 shares of common stock pursuant to an automatic shelf registration statement previously filed with the Securities and Exchange Commission. The price of this common stock offering will be $19.25 per share.

As per the agreement, the underwriters have an option to purchase 2,337,662 additional shares of common stock within a period of 30 days following the offering to cover over-allotments, if any.

Pepco Holdings intends to utilize the proceeds from its latest offering for repaying short-term debt obligations, providing capital to its utility subsidiaries, ensuring working capital funding and fulfilling other general corporate purposes.

The company issues notes and common stocks for meeting its obligations and requirements intermittently. Previously, Pepco Holdings completed a similar common stock offering program on December 2008, with 14.0 million shares at a public offering price of $16.50 per share. The company used the net proceeds from this offering to repay short-term debt obligations.

This offering has a strong impact on the financial leverage of the company, particularly on its debt-equity ratio. As of December 31, 2011, Pepco Holdings’ debt equity ratio was 51%.

With an increase in shareholders equity and a portion of the proceeds of this offering to be used for the repayment of short-term debt, we expect a decline in the company’s debt equity ratio in the near term. At the same time, the company’s interest expenses and debt burden will also decrease, and is likely to be offset by an increase in tax expenses.

Pepco Holdings reported mixed results in fiscal 2011. The company has a strong cash balance of $109 million compared with the year-ago figure of $20 million. It made significant investments in its infrastructure and has similar plans lined up for the coming years. We believe that these positives will add value to shareholders interest, but at the same time we are cautious about the uncertainties related to its pending rate cases.

Based in Washington, District of Columbia, Pepco Holdings Inc. is involved in the transmission and distribution of electricity, as well as delivery and supply of natural gas. The company’s major peers include FirstEnergy Corp. ( ( FE - Analyst Report ) and Constellation Energy Group Inc. ( ( ) .

Pepco Holdings currently retains a Zacks #4 Rank (short-term Sell rating).