Pepco Holdings Posts Solid Results; Maryland Regulatory Issues Persist


Pepco reported adjusted earnings per share of $0.22 for the second quarter of 2013 versus $0.20 in the same period last year. The improved results were driven by rate increases and lower operations and maintenance costs. Partially offsetting these favorable factors were a positive adjustment to default electricity supply margins in 2012 and lower unbilled revenue at Atlantic City Electric. Pepco reiterated its 2013 adjusted EPS guidance of $1.05-$1.20.

The 2.1% drop in weather-normalized power delivery sales during the second quarter and 1.1% drop year to date was disappointing, as the company had guided to 1.4% sales growth in 2013 at its March analyst conference. The sequestration appears to be a problem in Maryland and the District of Columbia, but weather-normalized sales for Atlantic City Electric were down a staggering 6.1% in the recently ended quarter versus the same period last year.

Rate mechanisms in Maryland and D.C. decouple approximately two thirds of Pepco’s distribution revenue from usage, reducing the impact of the sales decline. Regulatory lag and rate case decisions with allowed punitive returns on equity continue to be a problem for Pepco. In 2012, Pepco earned approximately 6.5% return on equity, well below its average 9.7% systemwide allowed ROE.

In July, the Maryland Public Service Commission in Pepco’s electric distribution rate case based its decision on a 9.36% ROE. This is among the lowest ROEs we have seen in recent rate case decisions and is hard to understand in light of Pepco’s improved reliability. The commission also denied two of three projects that would have been covered by the grid resiliency charge, investments that would have provided additional improvement to reliability. Pepco has appealed the decision, but analysts are not hopeful that anything will come of the court action.


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