Pepco Holdings Inc. (POM) reported fourth quarter 2011 earnings from continuing operations of 15 cents per share, falling short of the year-ago figure of 25 cents and the Zacks Consensus Estimate of 18 cents.

The year-over-year decline in operating earnings in the reported quarter was due to a lack of beneficial tax adjustments and settlement received by the company in the prior-year quarter.

Earnings per share, as per GAAP, were 10 cents versus 6 cents in the fourth quarter of 2010. The difference between GAAP and operating earnings during the reported quarter was due to a 5 cent mark-to-market loss on hedging activities.

Pepco Holdings’ 2011 operating earnings were $1.25 per share compared with $1.24 per share reported in 2010. Fiscal 2011 earnings also surpassed the Zacks Consensus Estimate of $1.22.

Full-year growth was driven by higher distribution revenue, higher transmission revenue, lower interest expense and higher default electricity supply margins.

GAAP earnings per share in 2011 were $1.15 versus 62 cents in 2010. The difference between GAAP and operating earnings for fiscal 2011 was due to the impact of a few one-time items, comprising an 8 cent mark-to-market loss on hedging activities and a 2 cent impact for change in tax laws in District of Columbia.

Total Revenue

Total revenue of the company at the end of the fourth quarter was $1.23 billion, down 18.7% from $1.51 billion in the year-ago period.

The year-over-year decline was primarily due to lower contribution from all its segments. Revenues at Pepco Energy Services decreased 11.2%, Power Delivery revenue decreased 39.2% and the Other segment revenue decreased 9%, on a year-over-year basis.

The company generated total revenue of $5.9 billion in 2011, down 15.9% from $7.3 billion reported in 2010.

Total 2011 revenue also missed the Zacks Consensus Estimate of $6.92 billion.

Operating Details

In 2011, total regulated transmission & distribution electric sales, at Power Delivery, dipped 2.8% to 49,266 gigawatt hours (GWh). The downside in sale of electricity in its service territory was due to the erratic weather pattern, which impacted demand. Weather adjusted electric sales were 48,785 GWh in 2011, compared with 49,047 GWh in 2010.

Total operating expenses at the end of the quarter and at 2011 end declined by 20% and 17.7%, respectively, from the comparable year-ago period. The majority of the savings in expenses came from lower fuel and energy costs.

Lower operating cost boosted the operating income of the company. Operating income in fourth quarter 2011 was $91 million versus $88 million in fourth quarter 2010. Operating income was $637 million in 2011, rising marginally from $624 million reported in 2010.

Financials Update

Cash and cash equivalents, including restricted cash, were $120 million as of December 31, 2011, down from $31 million as of December 31, 2010.

Long-term debts as of December 31, 2011 were $3,794 million versus $3,629 million as of December 31, 2010, up 4.5%.

Guidance

Pepco Holdings estimates 2012 earnings in the range of $1.15 to $1.30 per share. The guidance excludes the impact of discontinued operations and assumes normal weather during the year.

Peer Comparison

In the energy products and services niche, the company competes with Constellation Energy Group Inc. (CEG). The latter announced operating earnings for the fourth quarter 2011 of 5 cents per share, falling way below the Zacks Consensus Estimate of 63 cents and the year-ago earnings of 42 cents per share.

Constellation Energy’s quarterly revenues were $2.95 billion, down from the Zacks Consensus Estimate of $5.91 billion. Revenues were also lower than the $3.47 billion reported in the year-ago quarter.

Our View

Overall, Pepco Holdings had a mixed performance in fiscal 2011. The company during the year made significant investment in its infrastructure and is planning to invest further in the forthcoming years. The company was able to marginally increase on its 2010 customer level, which is a positive sign.

Pepco Holdings however has a few pending rate cases and, since the outcome of the same is uncertain, visibility on 2012 performance is low.

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. Pepco Holdings currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

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