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PCG Improves Bottom Line

Zacks Equity Research

PG&E Corporation’s (PCG) operating earnings per share of 89 cents in the first quarter of fiscal 2012 went past the Zacks Consensus Estimate of 71 cents and the year-ago number of 58 cents.

In the reported quarter, the positive variance of 31 cents year over year was attributable to the timing of rate case decisions in 2011 (14 cents), lower storm & outage expenses (7 cents), lower litigation & regulatory matters (5 cents), increase in rate base earnings (5 cents), higher gas transmission revenues (2 cents) and miscellaneous items (7 cents). These were partially offset by planned incremental work (6 cents) and the dilutive effect of higher shares outstanding (3 cents).

On a reported basis, the company clocked earnings per share of 56 cents compared with 50 cents in the year-ago quarter. In the reported quarter, the 33-cent difference between the reported and adjusted earnings was due to natural gas matters (23 cents) and environmental related costs (10 cents).

In the reported quarter, performance was affected by natural gas matters which include pipeline-related costs to validate operating pressures, conduct strength testing, and perform other activities associated with safety improvements to the Utility’s natural gas pipeline system, as well as legal and regulatory costs. These costs also included a contribution to the City of San Bruno to support the community’s recovery efforts related to a natural gas transmission pipeline accident in San Bruno, California on September 9, 2010. Costs incurred for the same were partially offset by insurance recoveries.

In the reported quarter, performance was also affected by charge related to environmental remediation costs associated with the Utility's natural gas compressor site located near Hinkley, California.

Revenue Update

PG&E’s revenue increased 1.2% year over year to approximately $3.6 billion in the reported quarter. However, this barely missed the Zacks Consensus Estimate by $24 million. Electric revenues rose 5.9% year over year to $2.8 billion, while Natural Gas revenues fell 11.3% to $869 million.


PG&E reaffirmed its fiscal 2012 operating earnings guidance range of $3.10–$3.30 per share. On a GAAP basis however fiscal 2012 earnings guidance range was updated to $1.80–$2.49 per share, compared with the previous range of $1.88–$2.67 per share. The guidance range was updated to reflect natural gas pipeline matters relating to a $70 million contribution made to the City of San Bruno and the $11 million of proceeds from insurance recoveries for third-party liability during the reported quarter.

The company is maintaining its 2012 guidance range for pipeline-related costs of $450 million to $550 million, with recent increases in legal expenses suggesting that total costs will trend toward the upper end of the range.

The company is also maintaining its guidance range for third-party liability claims of nil to $225 million pre-tax for the ongoing fiscal. This range represents the difference between the upper end of the company's estimated range for third-party liability of $600 million and the $375 million already accrued to date.

The company however updated its guidance range for environmental-related costs to $71 million to $100 million in fiscal 2012. The range has been updated to reflect charges related to the water treatment solutions at Hinkley plant in California.


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 energy 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.

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) will bode well for the company.

These positives, however, will be partially offset by risks, including the present tepid macro backdrop, extent of San Bruno liabilities, 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. Consequently, we advise investors to remain on the sidelines for the time being.

In the near term, we would advise investors to focus on its Zacks #2 Rank (short-term Buy rating) peers like The AES Corporation (AES) and Avista Corporation (AVA).

Read the Full Research Report on AES

Read the Full Research Report on PCG

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