Ahead of the Bell Pepco Holdings

Electricity and natural gas company Pepco Holdings Inc. holds an analyst meeting on Friday, where one analyst expects an update on profit margins and the company's merchant operations.

Pepco Holdings, which was formed by the merger of Pepco and Conectiv, serves customers in Delaware, Washington, D.C., Maryland and New Jersey.

Wachovia Capital Markets analyst Neil Kalton said Pepco Holdings will provide a 2009 gross margin outlook for its Conectiv Energy segment, which provides wholesale generation services. Kalton expects improved margins because of higher capacity prices and said the company has already hedged a "substantial" portion of 2009 energy and capacity.

"Many of Conectiv Energy's 2009 hedges were layered in during the period 2005 to 2007 when forward prices, on average, were lower than now," Kalton wrote in a client note.

Meanwhile, Kalton said investors may be wondering about strategic developments at Conectiv Energy. In recent months, Kalton said, industry newsletters have indicated that Pepco hired an investment bank to help explore alternatives for its merchant operations, such as a joint venture or sale.

Kalton is skeptical of speculation regarding a sale because of the timing of Pepco's equity issuance last November.

"If management were seriously contemplating an asset sale in the near future, we think it is unlikely that the company would publicly issue common stock that was not needed until late 2009," Kalton wrote

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Ahead of the Bell Pepco Holdings