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PG&E Corporation Misses Estimate

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PG&E Corporation (PCG - Free Report) posted operating earnings per share of 81 cents in the second quarter of 2012, missing the Zacks Consensus Estimate of 83 cents and the year-ago figure of $1.02 per share.

The year-over-year decline was due to the timing of rate case decisions in 2011, planned incremental work, and increases in shares outstanding, partially offset by increase in rate base earnings and gas transmission revenues.

On a reported basis, the company clocked earnings per share of 55 cents compared with 91 cents in the year-ago quarter. In the reported quarter, the difference of 26 cents between the reported and adjusted earnings was due to a charge related to natural gas matters.

In the reported quarter, overall performance was affected by pipeline-related costs to validate operating pressures, conduct strength testing, and perform other activities associated with safety improvements for the Utility’s natural gas pipeline system, as well as legal and regulatory costs.

A natural gas transmission pipeline accident in San Bruno, California occurred in September 2010. The decline also reflects an accrual for third party liability claims, primarily reflecting the recent resolution of a number of significant cases, partially offset by insurance recoveries for third-party liability.

Revenue Update

PG&E’s revenue inched down 2.5% year over year to approximately $3.59 billion, missing the Zacks Consensus Estimate by $302 million. Electric revenues inched up 1.5% year over year to $2.93 billion, while Natural Gas revenues fell 16.7% to $662 million.


PG&E reaffirmed its full-year 2012 operating earnings guidance range of $3.10–$3.30 per share. The guidance reflects incremental spending on operational improvements across the utility of approximately $250 million versus the prior expectation of $200 million. However, this increase will likely be offset by other factors.

The company expects GAAP earnings to be in the range of $1.83 to $2.41 versus its prior expectation of $1.80 to $2.49. This takes into account the accrual for third-party liability claims and insurance recoveries.

The company expects third-party liability claims to be in the range of $80 million to $225 million pre-tax versus its previous expectation of nil to $225 million pre-tax.

The low end of the range for 2012 reflects a rise of $80 million in the second quarter and corresponds to a total accrual of $455 million while the upper end corresponds to the high end of the range for third-party liability claims, remaining at $600 million since the accident. It expects insurance recoveries of $25 million.

The guidance also reflects the company’s expectation to issue approximately $700 million of common stock for full-year 2012.

At the peer

Recently, one of the company’s peers, American Electric Power Company Inc. (AEP - Free Report) reported stable second-quarter 2012 results. In the reported quarter, the company clocked operating earnings of 77 cents per share, beating the Zacks Consensus Estimate of 72 cents and the year-ago quarterly earnings of 73 cents per share.


PG&E Corporation missed our expectation due to total costs generated for natural gas pipeline-related actions. However, going forward, the company’s supportive regulatory environment in California, particularly its decoupling mechanism, favorable decisions from regulators, long-term supply contracts, diversification into alternative power sources and infrastructure improvement programs can turn to be key growth drivers for the company.

However, currently we remain concerned about the present unfavorable macro backdrop, headwinds in the California economy, tepid demand for electricity, and power-price volatility.

The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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