- The Washington Times - Monday, January 8, 2001

Shares of Potomac Electric Power Co. have been flat for a year in anticipation of electricity deregulation in Washington, but the date has arrived and the stock still has not moved.

"There is uncertainty as to what Pepco is actually going to be like in the future," says Maurice E. May, an analyst with Alrington-based Friedman, Billings, Ramsey.

The D.C.-based utility transmits, distributes and sells electricity to some 700,000 residential and business customers in Washington and most of Montgomery and Prince George's counties.

Prior to Jan. 1, when electricity was deregulated in the District, Pepco also generated electricity. Now the company has shed its power plants and is focused on transmitting and distributing power.

"They sold their power plants [to Southern Energy Inc. of Georgia for $2.75 billion] and now are sitting on a net-after cash pile of about $1 billion," Mr. May says. "There are a couple of things they can do with it: They can have a large share buyback and pay off some debt, or they can make an acquisition."

The uncertainty is what's keeping Pepco's stock flat, trading in the mid to high $20s for the past year, Mr. May says. The utility index, or average of all utility stocks combined, was up by 35 to 40 percent for 2000.

Shares of Pepco closed Friday at $21.82 on the New York Stock Exchange.

Another analyst, David Schanzer from Janney Montgomery Scott LLC in Philadelphia, says the availability of cash is good for Pepco.

"If anything, I think a lot of people would regard that as a positive thing," he says. "A lot of analysts believe that companies should buy back shares when they are in that position … I would prefer to see them make an acquisition or two."

It will take about four years for other power companies to become established in the District. Meanwhile, Pepco will keep its customers, because unlike power generation, the transmission and distribution sectors are still regulated by the government.

"Electrons go through those wires, and they don't own them anymore … but they own the wires and make money off maintaining that wire system," Mr. May says.

The D.C. Department of Transportation last month slapped Pepco with a $674,000 fine for violation of safety rules in connection with an oil spill in Prince George's County last April.

This month Pepco faces two court hearings on lawsuits filed against it by residents of the area damaged by the spill.

Last year also brought management changes at Pepco, which culminated in December with the naming of Dennis Wraase as president and chief operating officer. Other top executives at Pepco were moved up at the same time.

"I view [Mr. Wraase] as a very aggressive, entrepreneurial manager and consider his ascendancy to be good for shareholders," Mr. May says.

Pepco reported revenue for its July-September quarter fell 3 percent to $835.7 million from $861.7 million for the like quarter in 1999. For that time, income also fell by 21 percent to $123.1 million ($1.25 per diluted share) from $156.3 million ($1.04).

Diluted shares reflect the value of options, warrants and other securities convertible into common stock.


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