PG&E Corporation’s (PCG) operating earnings per share of 70 cents in the fourth quarter of fiscal 2010 fell short of the Zacks Consensus Estimate of 73 cents and the year-ago number of 80 cents.

The year-over-year difference of 10 cents was due to higher estimated costs incurred to complete the SmartMeter program (5 cents), the impact of a nuclear refueling outage at the Diablo Canyon Power Plant (3 cents), the dilutive effect of higher shares outstanding (2 cents), increased storm and outage expenses (1 cent), higher severance cost (1 cent), lower energy-efficiency incentive revenues (1 cent) and higher miscellaneous items (4 cents). This was partially offset by increase in rate base revenue (6 cents), and lower disability expense (1 cent).

On a reported basis, the company clocked earnings of 63 cents compared with 71 cents in the year-ago quarter. In the reported quarter the difference of 7 cent between the reported and adjusted earnings was due to a charge related to a natural gas transmission pipeline accident in San Bruno, California on the September 9, 2010.

Fiscal 2010 operating earnings came in at $3.42 per share, missing the Zacks Consensus Estimate of $3.45. However, this came higher than fiscal 2009 earnings of $3.21 per share.

Fiscal 2010 Revenue Update

PG&E’s revenue rose 3.3% to $13.8 billion in fiscal 2010 versus $13.4 billion in fiscal 2009, in-line with the Zacks Consensus Estimate of $13.8 billion. Electric revenues rose 3.8% year over year to $10.6 billion, while natural gas revenues rose 1.7% to $3.2 billion.

Financial Condition

PG&E ended 2010 with cash and cash equivalents of approximately $51 million compared with $334 million at year-end 2009. Cash generated from operations in 2010 totaled $3.2 billion versus cash from operations of $2.9 billion in the year-ago period. Long-term debt increased to $10.6 billion at the end of fiscal 2010 from roughly $10 billion in fiscal 2009.

Outlook

Going forward, PG&E will continue to focus on investing new capital to meet California’s renewable portfolio standard. As per the standard the utilities require to generate 33% of power from renewable sources by fiscal 2020. PG&E reaffirmed its fiscal 2011 operating earnings guidance range of $3.65 – $3.80 per share.

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 like 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. In the near-term we would advise investors to focus on its Zacks #1 Rank (short-term Strong Buy rating) peers like Enersis S.A. (ENI) and Brookfield Infrastructure Partners L.P. (BIP).

 
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