PG&E Corporation’s (PCG) earnings per share of $1.02 in the third quarter of fiscal 2010 comfortably beat the Zacks Consensus Estimate of 95 cents. It also exceeded the year-ago EPS of 93 cents.
The year-over-year improvement of 9 cents was due to the increase in rate base revenue (7 cents), disability expense (2 cents) and miscellaneous items (3 cents). This was partially offset by severance cost (1 cent) and the dilutive effect of higher shares outstanding (2 cents).
On a reported basis, the company clocked earnings of 66 cents compared with 83 cents in the year-ago quarter. In the reported quarter the 36-cent difference between the reported and adjusted earnings was due to 36 cents per share charge related to a natural gas transmission pipeline accident in San Bruno, California on the September 9, 2010.
Operational Results
PG&E’s revenue rose 8.6% to $3.5 billion from $3.2 billion in the year-ago quarter, falling short of the Zacks Consensus Estimate of $3.7 billion. Electric revenues rose 8.6% year over year to $2.9 billion, while natural gas revenues rose 8.4% to $656 million.
PG&E’s earnings from operations were $398 million compared with $358 million in the year-ago period. However net earnings fell to $258 million in the reported quarter compared to $318 million in the year-ago quarter. The fall was due to a charge of $141 million for the San Bruno pipeline accident, including estimated third-party claims for personal injury and property damage claims, other damage claims, and costs incurred while responding to the event.
Outlook
Going forward, PG&E will continue to focus on investing new capital consistent with California’s focus on clean energy. The company is mandated by California’s renewable portfolio standard to raise its renewable generation. California’s renewable portfolio standard requires utilities to generate 33% of power from renewable sources by fiscal 2020.
PG&E lowered its overall guidance range on a GAAP-basis to reflect estimated costs associated with the San Bruno accident to $2.72 – $2.92 per share for 2010.
PG&E reaffirmed its previous guidance range of $3.35 – $3.50 per share for earnings from operations in fiscal 2010, in line with the Zacks Consensus Estimate of $3.40.
We believe, going forward favorable decisions from regulators, long-term supply contracts, diversification into alternative power sources and infrastructure improvement programs (such as Cornerstone and Smart Meter) bode well for the company.
These positives, however, will be partially offset by risks, including the present tepid macro backdrop, headwinds in the California economy, earnings dilutive issuances and power-price volatility.
We have a Zacks #3 Rank (short-term Hold rating) on the stock. This implies that the stock is expected to perform in line with the broader U.S. equity market over the next 1–3 months. We are Neutral on PG&E in the long-term, which indicates that the shares are expected to replicate its short-term performance, but not over 6+ months. Consequently, we advise investors not to take any position on the stock for the time being.
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