Thursday, June 24, 2010

Pepco Redeems Senior Notes

Pepco Holdings Inc. (POM: 16.02 +0.07 +0.44%) has decided to redeem up to $950 million of its 6.45% senior notes due 2012. However, the offer hinges around the divestiture of its wholesale power generation business to Calpine Corporation (CPN: 13.00 -0.38 -2.84%). The offer will expire on July 19, 2010.
On April 20, 2010, Pepco Holdings agreed to sell Conectiv Energy’s power generation assets to Calpine Corporation for $1.7 billion. The sale, which is expected to close by July 1, 2010, does not include Conectiv’s load service supply contracts, energy hedging portfolio, certain tolling agreements and several other non-core assets. 
The liquidation of the remaining assets and contracts of the Conectiv Energy segment are expected within the next 12 months. Pepco Holdings expects to use $2.05 billion ($1.75 billion net of taxes) from the sale and liquidation, primarily for the parent company’s debt reduction.
As of March 31, 2010, Pepco Holdings had cash and cash equivalents of $38 million and long-term debt of $4.5 billion. Total long-term liabilities at quarter-end were $4.96 billion compared with $4.94 billion at year-end 2009.
Pepco engages in both regulated utility and unregulated businesses. Pepco, also referred as PHI, is one of the largest energy delivery companies in the Mid-Atlantic region, delivering a combined 50,000 gigawatt hours (GWh) of power to nearly 1.9 million customers in Delaware, the District of Columbia, Maryland and New Jersey. 
Pepco is an attractive investment based on its relatively high dividend yield of 7.0%. Going forward, however, we expect the stock to face stiffer competition from its fully regulated peers like Allegheny Energy Inc. (AYE: 21.11 +0.07 +0.33%)Constellation Energy Group Inc. (CEG: 34.57 -0.16 -0.46%) andPublic Service Enterprise Group Inc. (PEG: 32.19 +0.48 +1.51%) with similar dividend yields. Thus, we expect Pepco shares to Underperform its peers in the future.

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