UPDATE 1-JP Morgan cuts Pepco, Vectren to underweight

Oct 22 (Reuters) - J.P. Morgan Securities downgraded Pepco Holdings Inc (POM.N) and Vectren Corp (VVC.N) to "underweight" from "neutral."

Analyst Andrew Smith recommended pairing a short Pepco position with a long side on NRG Energy Inc (NRG.N), Dynegy Inc (DYN.N) or Edison International (EIX.N), saying the companies may benefit from a rise in natural gas prices.

The analyst also recommended shorting Vectren against long positions on NV Energy Inc (NVE.N) or Wisconsin Energy Corp (WEC.N) as it expects both the stocks to offer attractive, stable and regulated earnings growth.

Smith said the downgrade of electric-services company Pepco was based on expectations of a difficult outlook for its unregulated power plant arm, Conectiv Energy.

The analyst lowered his rating on energy-holding company Vectren, citing difficult market conditions for its coal mining and gas marketing and storage segments in 2010.

Shares of Pepco and Vectren were down 2 percent in morning trade Thursday on the New York Stock Exchange. (Reporting by Antonita Madonna Devotta in Bangalore; Editing by Vinu Pilakkott)