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Pepco Lags, Guides Low

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Pepco Holdings Inc. reported fourth quarter 2012 earnings from continuing operations of 19 cents per share, surpassing  the year-ago figure of 15 cents by 26.7% but missing the Zacks Consensus Estimate of 20 cents by a penny.

The year-over-year increase in operating earnings was primarily due to higher electric transmission and distribution revenue partially offset by lower Pepco Energy Services earnings.

Earnings per share, as per GAAP, were 18 cents versus 10 cents in the fourth quarter of 2011. The difference between GAAP and operating earnings during the reported quarter was due to a gain of 1 cent mark-to-market from hedging activities and a 2 cent impairment charge related to Pepco Energy Services’ long-lived assets.

Pepco Holdings' 2012 operating earnings were $1.21 per share, down 3.2% from $1.25 reported in 2011. Earnings were in line with the Zacks Consensus Estimate.

The annual decline was due to lower earnings from Pepco Energy Services, lower default electricity supply margins and higher interest expense.
GAAP earnings per share in 2012 were $1.24 versus $1.15 in 2011. The difference between GAAP and operating earnings for 2012 was due to the impact of a few one-time items, comprising an 8 cent mark-to-market gain on hedging activities and a 3 cent impairment charge related to Pepco Energy Services’ long-lived assets.

Total Revenue

Total revenue at the end of the fourth quarter was $1.13 billion, down 9.5% from $1.25 billion in the year-ago period. Quarterly revenue also fell short of the Zacks Consensus Estimate of $1.29 billion by 12.6%.

The year-over-year decline was primarily due to lower contribution from Pepco Energy Services which declined 55.3% on a year-over-year basis. This was offset partially by better performance from Power Delivery which grew 2.6% and a 20% improvement in the Other segment.

Total 2012 revenue of $5.1 billion missed the Zacks Consensus Estimate of $5.54 billion.

Operating Details

In 2012, total regulated transmission & distribution electric sales, at Power Delivery, dipped 2.3% to 48,142 gigawatt hours (GWh). The downside was due to the erratic weather pattern, which impacted demand. Weather adjusted electric sales were 48,182 GWh in 2012, compared with 48,785 GWh in 2011.

Total operating expenses at the end of the quarter and at 2012 end declined by 12.3% and 16.9%, respectively, from the comparable year-ago period. The majority of the savings in expenses came from lower fuel and energy costs.  

Despite a decline in revenue at the end of the quarter and also in 2012, the lower operating cost boosted the operating income of the company. Operating income in fourth quarter 2012 was $115 million versus $91 million in fourth quarter 2011. Operating income was $670 million in 2012, rising marginally from $637 million reported in 2011.

Financial Update

Cash and cash equivalents, including restricted cash, were $35 million as of Dec 31, 2012, down from $120 million as of Dec 31, 2011.

Long-term debts as of Dec 31, 2012 were $3,648 million, down 3.8% from $3,794 million as of Dec 31, 2011.


Pepco Holdings estimates 2013 earnings in the range of $1.05 to $1.20 per share, lower than 2012 levels. The guidance excludes the impact of discontinued operations and assumes normal weather during the year.

Other Company Release

Pike Electric Corporation reported earnings of 67 cents per share in the second quarter of fiscal 2013, widely surpassing the Zacks Consensus Estimate of 25 cents.

Otter Tail Corporation (OTTR - Free Report) announced fourth-quarter 2012 operating earnings of 47 cents per share, 56.7% above the Zacks Consensus Estimate of 30 cents.

Public Service Enterprise Group Inc. (PEG - Free Report) reported fourth quarter 2012 earnings of 41 cents per share, up 5.1% from the Zacks Consensus Estimate.

Our View

Pepco Holdings reported lower-than-expected results primarily due to lower retail energy supply and a challenging energy services market.

The outcome of some pending rate cases in 2012 disappointed Pepco Holdings’ expectation. Pepco Holdings still has a few pending rate cases and, since the outcome of the same is uncertain, visibility on 2013 performance is low.

The company decided to invest $5.9 billion in the electric system over the next five years to better serve its customers. However, if the company fails to recover the same through constructive regulatory outcomes, future growth investment of the company might be jeopardized.
Based in Washington, DC, Pepco Holdings, through its two operating divisions -- Power Delivery and Competitive Energy -- is engaged in the transmission and distribution of electricity, as well as delivery and supply of natural gas.  Pepco Holdings currently retains a Zacks Rank #4 (Sell).

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