Opportunities in a Changing Energy Landscape - Pepco Holdings (POM)

The regulatory environment for natural gas and energy suppliers in the US is being shaken up as utility providers seek to lift tariffs to expand their infrastructure and meet rising energy demand. While this may place pressure on consumers, it does provide investors with an opportunity to take a closer look at the sector for quality dividend paying companies.

One such company is Pepco Holdings (POM) which provides natural gas to nearly 1.9 million customers in New Jersey, Delaware, Maryland, and the District of Columbia.

Relative to some of its peers, Pepco (POM) trades on a forward price to earnings multiple of just under 17 times earnings, indicating that investors believe it will be able to accelerate earnings in the coming years. While it might be more richly priced than its peers the company also offers a superior historical dividend yield of around 6.2% making it ideal for investors seeking dividends from their investments.

In February Pepco (POM) reported full year 2009 consolidated earnings of $235 million, or $1.06 per share, compared to $300 million, or $1.47 per share, in 2008. 2009 was a challenging earnings year given the pressures of the wholesale energy market, the economic downturn, and the impact of higher pension expenses and capital costs principally incurred to support rate base growth which are not yet fully reflected in regulated rates.

The company however highlighted opportunities linked to a number of a regulatory changes, which the company anticipates will provide a boost to earnings in the coming years.

In December 2009, Pepco (POM) received an $8 million annual increase in Delmarva Power's electric distribution base rates, effective from December 2009. It is awaiting approval on a $40 million increase in Maryland, $54 million in New Jersey and another $50 million in Columbia. The company is expected to have a resolution on these soon.

In April the company also signed a $168.1 million contract with the Department of Energy for smart grid projects in the District of Columbia, Maryland and New Jersey, which will accelerate the delivery of customer benefits through building an integrated smart grid composed of advanced metering infrastructure, distribution automation and demand response technologies.