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POM AT A GLANCE

P/E ► 12.5 AVG EV/EBITDA ► 5.77 AVG ROA ► 4% AVG ROE ► 6.3% AVG Debt to Equity ► 2.73 AVG Current Ratio ► 0.913 AVG Interest Coverage Ratio ► 2.01 AVG

 

 

 

 

 

 

"Pepco Holdings", Inc (NYSE:POM) (also known as PHI) is a public utilities holdings company which generate and distributes electricity and natural gas to mainly 1.8 million residential, commercial and industrial customers in Maryland and Washington D.C.^[1]

From 2003 to 2007, the company's revenue increased at an average rate of 7% while its profit margin increased at an average rate of 3.3%. Profit margins lagged revenue growth due to the high cost of raw fuel. In 2006, the cost of fuel was highest in the 5 years and led to POM decrease in net income from $371 million to $248 million.^[2]

On 5 January 2009, POM subsidiaries, Pepco Energy Services, was awarded a $5 billion contract from the U.S. Department of Energy.^[3] In the contract, Pepco Energy will design and construct new cost saving projects for government facilities. The improvements are projected to generate savings sufficient to pay for their own projects over the term of the contract and lower operating cost.^[4]

Company Overview

POM's 2 principal business operations are Power Delivery and Competitive Energy. Power Delivery business is engaged in transmission, distribution and supply of electricity. Where else, Competitive Energy business is engaged in the generation of electricity and marketing of electricity and natural gas, and related energy management services, in the mid-Atlantic region.

Financial Analysis

Financial performance from 2003-2007. Despite the increase in revenue over the 5 year, net profit has not follow suit. It dropped in 2005 due to high cost of fuel.^[5]

In the 2008, third quarter earnings showed a 16.8% increase in revenue to $8,218.6 million but made a net loss of $43.4 million compared to 2007 third quarter earnings. This was largely due to increase in operating expenses thanks to raw fuel cost which increased by $993.5 million.

In 2007, POM had revenue of $9.3 billion, which was an increase of 12% from $8.3 million in 2006. POM had net income of $334.2 million in 2007 and a profit margin of 3.6%.^[6]

POM's increase in revenue was largely due to a $646.0 million increase in operating revenue thanks to higher volumes of electricity served, increased prices, and an increased customer base.^[7]

In 2006, POM revenue of $8.3 million was an increase of 3.7% from $8 billion in 2005.^[6] Its net income was $248.3 million with a profit margin of 3%.^[8]

POM's increase in revenue was largely due to a $518.9 million increase in Default Electricity Supply revenue-- customers that did not elect to purchase electricity from any supplier and as a result allows POM to be their default electricity supplier.^[9]

Business Segments

The bar graph above shows the different business segments' revenue and expenses.^[10]

Pepco Holdings’ has 5 Business Segments. They are Power Delivery, Conectiv Energy, Pepco Energy services, other Non-regulated services, and Corp and others.

• Power Delivery (Total Revenue of 56% and Operating Profit of 70%) - Power Delivery consists of transmission, distribution and supply of electricity. Its revenue was $5,244.2 million and net income was $231.8 million. Power Delivery is Pepco Holdings' main source of revenue and profit.^[11] Revenue from Maryland accounted for 67% of Power Delivery revenue in 2007, which is a decrease of 8% from 2006. ^[12]

• Conectiv Energy (Total Revenue of 23% and Operating Profit of 22%) - Conectiv Energy provides wholesale electric power, capacity, and ancillary services in the wholesale markets and also supplies electricity to other wholesale market participants under long- and short-term bilateral contracts. They do not participate in the retail competitive power supply market. ^[13] In 2007, Conectiv Energy's revenue was $2,205.6 million and net Income $73 million.

• Pepco Energy Services (Total Revenue 24% and Operating Profit 11%) - Pepco Energy Services provides energy supply to commercial, industrial, and government customers. In 2007, their total revenue was $2,205.6 million and their net income was $38.4 million. Although they had a $640.2 million increase in revenue.^[14] The increase was offset by the losses in not entering wholesale contracts and impairment losses related to certain energy services business assets in 2007.^[15]

• Other Non-regulated services (Total Revenue of 0.8% and Operating Profit of 13%) - Through its subsidiary, Potomac Capital Investment Corporation (PCI), POM maintains a portfolio of cross-border energy sale-leaseback transactions --transaction wherein the owner of a property sells a property and then leases it back--, with a book value at December 31, 2007 of approximately $1.4 billion.^[16] In 2007, Other Non-Regulated Service revenue was $76.2 million and net Income was $45.8 million.

• Corp and others (Operating Loss 5% and Net Loss of 17%) - Under Corps and others, the losses are due to unallocated Pepco Holdings’ (parent company) capital costs, such as acquisition financing costs, and the depreciation and amortization related to purchase accounting adjustments for the fair value of Conectiv assets and liabilities as of the August 1, 2002 acquisition date. Its operating loss was 468.7 million and net loss was $54.8 million.^[17]

In 2007, POM's 2 main geographic region were Maryland and Washington DC. Maryland accounts for 57% of electricity delivery revenue and Washington, D.C accounts for 43% of electricity revenue^[18]

Geographic Regions

As mentioned POM generates and distributes electricity and natural gas to Washington, D.C. and major portions of Prince George’s and Montgomery Counties in suburban Maryland.^[19] In 2007, it had approximately 57% of delivered electricity revenue were from Maryland and approximately 43% were from Washington, D.C. ^[20]

Key Trends and Forces

Pepco Energy Services Awarded $5 Billion Master Contract by U.S. Government

On 5 January 2009, POM subsidiary, Pepco Energy Services, was awarded a 5 year contract which is worth $5 billion contract from the U.S. Department of Energy.^[21] It is part of an effort to improve energy efficiency, renewable energy and water-conservation projects at federal government buildings. In the contract, Pepco Energy will design and construct new cost saving projects for government facilities. The improvements are projected to generate savings and accrued additional saving to POM.^[22]

PHI and its subsidiaries are subject to regulatory treatment

POM’s Power Delivery businesses are subject to regulation by various regulatory agencies that significantly affects their operations. In addition, the rates that POM can charge for electricity transmission and natural gas transportation are regulated by Federal Energy Regulatory Commission (FERC). The companies cannot change without the approval by the applicable regulatory authority.^[23]

POM raised $1.6 billion of capital by issuing 14 million shares at $16.50 each

The recent disruptions in the capital and credit markets, combined with the volatility of energy prices, have had an impact on several aspects of POM businesses. On 6 November 2008, to address the liquidity problem of increased deferred credit from $3,705.5 million to $4,311 million,^[24] POM offered a discount offering for 14 million shares of its common stock through a group of underwriters led by Morgan Stanley & Co. Inc., Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc. as joint book running managers at $16.50 per share.^[25] The $1.6 billion raised was used for infrastructure spending. It was used to improve reliability by building additional transmission lines in their service territories.^[26] As of September 2008, their 3rd Quarter earnings fell 25%, from $26.5 million to $20.1 million.^[27] This was due to the 13% increase in cost of fuel and maintenance from $934.5 million to $1052.3 million.^[28]

POM expenses to increase due to MAPP (Mid-Atlantic Power Pathway) and Blueprint for the Future initiatives

On 17 October 2007, POM received an approval from the PJM Interconnection, the world's largest transmission organization in wholesale electricity market,^[29] for its proposed Mid-Atlantic Power Pathway (MAPP). The interstate power line would improve transmission capacity in the congested regions. The project cost will be borne by Delmarva Power first, with the balance shared by Pepco and Atlantic City Electric. The construction is expected to be carried out in sections over a six-year period with completion targeted by 2013.^[30] Similarly, in 2007, PHI announced the “Blueprint for the Future" initiative. The project is expected to be completed in 2011. The initiative combine traditional energy efficiency programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy.^[31] This initiative will cost $646 million over the period of 4 years. Once the projects are completed,the projected capital expenditures for the MAPP initiative is for facility replacements and upgrades to accommodate customer growth and reliability.^[32]

Competition

The Utilities industry located in the mid-Atlantic region are characterized by intense competition at both the wholesale and retail levels. The nature of the industry is unregulated. At the wholesale level, Conectiv Energy and Pepco Energy Services compete with numerous non-utility generators. At the retail level, Pepco Energy Services competes with numerous competitive energy marketers and other service providers. They compete based on price and the range of services offered to customers.^[33]

• Allegheny Energy (AYE) engages in the ownership and operation of electric generation facilities and delivers electric services to customers mainly in Pennsylvania, West Virginia, Maryland, and Virginia. In addition, they operate in two segments, Delivery and Services, and Generation and Marketing. In 2007, they had $3.3 billion in total revenue, $412.2 million and 12% profit margin.^[34] AYE most important business segment is Delivery and Services segment. It accounts for 85% of total revenue.^[35]

• Constellation Energy Group (CEG) supplies energy products and services to wholesale customers, and retail commercial, industrial, and governmental customers in North America. It primarily operates in three segments. They are Merchant Energy, Regulated Electric, and Regulated Gas.In 2007, they had $21.1 billion in total revenue, $821.5 million and 4% profit margin.^[36] CEG's most important business segment is distribution of Merchant Energy which constituted 83% of total revenue.^[37]

• Public Service Enterprise Group (PEG) through its subsidiaries, engages in the transmission, distribution, and sale of electric energy and natural gas to commercial, residential, and industrial customers primarily in the Northeastern and Mid Atlantic United States. In 2007, they had $12.8 billion in total revenue, $1.3 million and 12% profit margin.^[38] The most important business segment of PEG is Public Service Electric and Gas Company (PS%&G) which accounts for 66% of total revenue.^[39]

References

1. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 2 and 3.
2. ↑ ROP 2007 10-K, Part I, Item 8, "Financial Statements and Supplementary Data", Page 145.
3. ↑ BusinessWeek-Pepco Energy gets $5B contract with Energy Dept.
4. ↑ BusinessWeek-Pepco Energy gets $5B contract with Energy Dept.
5. ↑ ROP 2007 10-K, Part I, Item 8, "Financial Statements and Supplementary Data", Page 145.
6. ↑ ^{6.0 6.1} ROP 2007 10-K, Part I, Item 8, "Financial Statements and Supplementary Data", Page 145.
7. ↑ ROP 2007 10-K, Part I, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 52.
8. ↑ ROP 2006 10-K, Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", Page 51.
9. ↑ ROP 2006 10-K, Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", Page 49.
10. ↑ ROP 2006 10-K, Part I, Item 8, "Changes in and Disagreements With Accountants on Accounting and Financial Disclosure", Page 176.
11. ↑ ROP 2007 10-K, Part I, Item 9, "Changes in and Disagreements With Accountants on Accounting and Financial Disclosure", Page 176.
12. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 7.
13. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 10.
14. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 52.
15. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page43.
16. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 13.
17. ↑ ROP 2007 10-K, Part I, Item 9, "Changes in and Disagreements With Accountants on Accounting and Financial Disclosure", Page 176.
18. ↑ ROP 2007 10-K, Part I, Item 1, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 107.
19. ↑ ROP 2007 10-K, Part I, Item 1, "Businesses", Page 11.
20. ↑ ROP 2007 10-K, Part I, Item 8, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Page 107.
21. ↑ BusinessWeek-Pepco Energy gets $5B contract with Energy Dept.
22. ↑ BusinessWeek-Pepco Energy gets $5B contract with Energy Dept.
23. ↑ http://www.sec.gov/Archives/edgar/data/8192/000113597108000035/phi10k2007.htm ROP 2008 10-Q, Part I, Item 1A, "Risks Factors", Page 20.]
24. ↑ http://www.sec.gov/Archives/edgar/data/8192/000113597108000035/phi10k2007.htm ROP 2007 10-Q, Part I, Item 8, "Financial Statements and Supplementary Data", Page 148.]
25. ↑ Pepco Holdings, Inc Official Website
26. ↑ BusinessWeek, Managing Through a Crisis: The New Rules, 9 Jan 2009
27. ↑ http://www.sec.gov/Archives/edgar/data/8192/000113597108000122/phi2008q3.htm ROP 2008 10-Q, Part I, Item 2, "Financial Condition", Page 98.]
28. ↑ http://www.sec.gov/Archives/edgar/data/8192/000113597108000122/phi2008q3.htm ROP 2008 10-Q, Part I, Item 2, "Financial Condition", Page 98.]
29. ↑ PJM Official Website
30. ↑ ROP 2007 10-K, Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", Page 76.
31. ↑ ROP 2007 10-K, Part I, Item 1, "Business", Page 75.
32. ↑ ROP 2007 10-K, Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", Page 112.
33. ↑ Segment1 ROP 2007 10-K, Part I, Item 1, "Business", Page 16.
34. ↑ Segment1 ROP 2007 10-K, Part I, Item 6, "Selected Financial Data", Page 58.
35. ↑ Segment1 ROP 2007 10-K, Part I, Item 8, "Financial Statements And Supplementary Data", Page 146.
36. ↑ ROP 2007 10-K, Part I, Item 6, "Selected Financial Data", Page 29.
37. ↑ ROP 2007 10-K, Part I, Item 6, "Business", Page 2.
38. ↑ ROP 2007 10-K, Part I, Item 8, "Financial Statements and Supplementary Data", Page 167.
39. ↑ ROP 2007 10-K, Part I, Item 8, "Financial Statements and Supplementary Data", Page 167.