Pepco Profits Up, Guides 2011 - Analyst Blog

Pepco Holdings Inc. (POM) reported fourth quarter 2010 earnings from continuing operations of 25 cents per share, beating the year-ago figure of 17 cents and the Zacks Consensus Estimate of 11 cents.

The year-over-year growth was driven by higher distribution and transmission revenue from higher rates in effect, higher sales, lower interest expense, and an adjustment related to a federal income tax settlement.

Earnings per share, as per GAAP, were 6 cents versus 17 cents in the fourth quarter of 2009. The difference between the GAAP and operating earnings during the reported quarter was due to the impact of a couple of one-time items. These are a 4-cent charge for restructuring and a 15-cent impact for debt extinguishment.

Pepco Holdings' 2010 operating earnings were $1.24 cents per share compared with 85 cents per share reported in 2009. Fiscal 2010 earnings also surpassed the Zacks Consensus Estimate of $1.08 as provided by 9 covering analysts.

The full-year growth was driven by higher distribution revenue, higher transmission revenue, lower interest expense and favorable income tax adjustments.

GAAP earnings per share in 2010 were 62 cents versus $1.01 in 2009. The difference between the GAAP and operating earnings for fiscal 2010 was due to the impact of a few one-time items, comprising an 8 cent charge for restructuring, 51 cents for debt extinguishment and 3 cents on Pepco generation assets divestiture.

Total Revenue

Total revenue of the company at the end of the fourth quarter was $1.51 billion, down 8.0% from $1.65 billion in the year-ago period. The year-over-year decline was primarily due to lower contribution from Pepco Energy Services, partly countered by higher contribution from Power Delivery and Other segments.

The company generated total revenue of $7.3 billion in 2010, down 4.9% from $7.4 billion reported in 2009. The yearly results declined because of the same reasons that led to the fourth quarter shortfall.

Total 2010 revenue also missed the Zacks Consensus Estimate by $6 million.

Quarterly Highlights

Total operating expenses of the company at the end of the fourth quarter of 2010 were $1.43 billion versus $1.52 billion in the year-ago period.  The decline stemmed from lower fuel and purchase energy costs.

Lower costs failed to have any appreciable impact on the operating earnings of the company, affected as it was by much lower revenues.

Operating income of the company during the fourth quarter declined sharply by 31.2% to $88 million from $128 million reported in the comparable period last year.

Annual Highlights

In 2010, total regulated transmission & distribution electric sales, at Power Delivery, rose 4.1% to 50,703 gigawatt hours (GWh), while the total default electric supply sales decreased marginally by 1.3% to 24,512 GWh.

In the electric service territory of Pepco Holdings, cooling degree days were higher by 48% and heating degree days were lower by 3%, both year over year.  Weather adjusted electric sales were 49,047 GWh in 2010, compared with 48,783 GWh in 2009.

Total operating expenses of the company at the end of 2010 were $6.41 billion versus $6.75 billion in 2009. The majority of the cut in expenses came from lower fuel and energy costs while all other costs saw an upward curve over the year.

Operating income in 2010 was $624 million versus $648 million in 2009. Of the total, Power Delivery contributed $503 million, Pepco Energy Services offered $71 million, while Other chipped in $50 million.

Interest expenses at the end of 2010 were $306 million, 10.0% lower than 2009 levels of $340 million. The reduction in interest expenses was due to repayment of $1.3 billion of debt, net of issuances, primarily with the proceeds from sale of assets.

Financials Update

Cash and cash equivalents, including restricted cash, were $31 million as of December 31, 2010, down from $55 million as of December 31, 2009.

Long-term debts of the company as of December 31, 2010 were $3,629 million versus $4,470 million as of December 31, 2009, reflecting a decline of 19%.

Guidance

Pepco Holdings estimates 2011 earnings in the range of $1.10 to $1.25 per share. The guidance excludes the impact of discontinued operations and assumes normal weather during the year.

Peer Comparison

Allegheny Energy Inc. (AYE) competes directly with Pepco Holdings. The former announced operating earnings for the fourth quarter 2010 of 62 cents per share, beating the Zacks Consensus Estimate of 45 cents but came short of the year-ago quarter earnings of 66 cents per share.

Fiscal 2010 ongoing earnings came in at $2.53 per share, beating the Zacks Consensus Estimate of $2.36 and the year-ago figure of $2.33 per share.

Our View

Though the top line was far from impressive in fiscal 2010, the company did register an expansion in its customer base of regulated transmission & distribution operations.

In 2010, consumers grew by 9,000, wholly from the residential sector while commercial and industrial remained at par with year-ago levels. It would be interesting to see whether Pepco Holdings would be able to expand further its base of consumers this year.

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 Deliver and Competitive Energy, involves in transmission and distribution of electricity, as well as delivery and supply of natural gas.