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Pepco Holding Misses Overall

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Pepco Holdings Inc. reported second quarter 2012 earnings from continuing operations of 25 cents per share, much lower than the year-ago figure of 43 cents. The earnings were also lower than the Zacks Consensus Estimate of 32 cents.

The year-over-year decline in earnings was due to higher operating and maintenance expenses at Power Delivery services and lower earnings at Pepco Energy Services.

Earnings per share, as per GAAP, were 27 cents versus 42 cents in the second quarter of 2011. The difference between GAAP and operating earnings during the reported quarter was due to a 3 cent mark-to-market gain on hedging activities and a charge of 1 cent due to impairment of assets.

Total Revenue

Total revenue of the company at the end of the second quarter was $1.18 billion, down 16.5% from $1.41 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.

Revenues also failed to match the Zacks Consensus Estimate of $1.95 billion.

Quarterly Highlights

Total operating expenses were $1.03 billion versus $1.21 billion in the year-ago period.  The decline stemmed from a 31.6% decrease in fuel and purchase energy costs.

Lower expenses notwithstanding, operating income at Pepco declined to $152 million in second quarter 2012 from $202 million in the prior-year quarter. This was largely due to the weak top-line.

Interest expenses at second quarter end were $65 million versus $63 million at the end of the year-earlier period.

Financial Update

Cash and cash equivalents, including restricted cash, were $48 million as of June 30, 2012, lower than $120 million as of December 31, 2011.

Long-term debt of the company as of June 30, 2012 was $4,203 million versus $3,794 million as of December 31, 2011.


Pepco Holdings reiterated its 2012 earnings per share outlook in the range of $1.15 to $1.30. The guidance excludes the impact of discontinued operations and assumes normal weather during the year.

Peer Comparison

In the energy products and services niche, the company competes with NiSource Inc. (NI - Free Report) . The latter posted second quarter 2012 net operating earnings of 23 cents per share compared with 17 cents in the prior-year quarter. Quarterly earnings beat the Zacks Consensus Estimate of 20 cents.

Total revenue in the quarter under review declined 12.1% year over year to $1,038.1 million from $1,181 million in the second quarter of 2011. The year-over-year decline was due to significantly lower revenues from the Gas Distribution segment, which plummeted 42.3% year over year. Reported revenue missed the Zacks Consensus Estimate of $1,165 million.

Our View

The company missed our expectation in the wake of poor performance from both its operating segments. The rate case decision in Maryland was also not very encouraging. Pepco is scheduled to file for rate increases in Maryland in the fourth quarter of 2012.

Looking ahead, we believe the violent storm, which occurred in Pepco’s service territories, will negatively impact its operating results in the coming quarter.

Pepco Holdings currently retains a Zacks #3 Rank (short-term Hold rating).

Based in Washington, District of Columbia, Pepco Holdings, through its two operating divisions, Power Delivery and Competitive Energy, involves in transmission and distribution of electricity, as well as delivery and supply of natural gas.  

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