SAN FRANCISCO — PG&E Corporation’s (NYSE: PCG) second quarter 2012 net income after dividends on preferred stock (also called “income available for common shareholders”) was $235 million, or $0.55 per share, as reported in accordance with generally accepted accounting principles (GAAP). This compares with $362 million, or $0.91 per share, for the second quarter of 2011.
The decrease in quarterly GAAP results year-over-year is explained by several factors. The year-ago period included an additional quarter of incremental revenues, reflecting the April and May 2011 approvals of the utility’s Gas Transmission and Storage Case and 2011 General Rate Case, both of which were retroactive to the beginning of the year. The results also reflected higher pipeline-related costs this quarter and an additional provision for third-party claims.
GAAP results include costs related to natural gas matters that management does not consider part of normal, ongoing operations (an item impacting comparability), totaling $183 million pre-tax, or $0.26 per share.
The item included $128 million pre-tax, or $0.18 per share, during the quarter for continuing work to validate safe pipeline operating pressures and conduct strength testing, as well as legal and other expenses following the September 2010 San Bruno pipeline accident. This brings the total costs for natural gas pipeline-related actions since the accident to approximately $775 million, all of which have been incurred at shareholders’ expense.
In addition, the item included an accrual of $80 million pre-tax, or $0.11 per share, for third-party liability claims, primarily reflecting the recent resolution of a number of significant cases. Provisions taken to date for third-party liability claims now total $455 million. The item also reflected the benefit of $25 million pre-tax, or $0.03 per share, of insurance recoveries for third-party liability, bringing total insurance recoveries to $135 million since the accident. PG&E continues to expect that a significant portion of its third-party liability costs will be recovered through insurance.
“We successfully accomplished the work we planned for the second quarter, and we’re following through on our commitments to improve system safety and reliability, in line with our back-to-basics strategy,” said Chairman, CEO and President Tony Earley. “Our major priorities continue to be resolving outstanding gas-related issues, positioning the company for long-term success and rebuilding relationships with our stakeholders.”
Earnings from operations
On a non-GAAP basis, excluding the item impacting comparability, PG&E Corporation’s earnings from operations for the second quarter were $343 million, or $0.81 per share. During the same period in 2011, earnings from operations were $406 million, or $1.02 per share.
The quarter-over-quarter difference reflects several factors. Most significantly, $0.13 per share of the decrease is attributable to the timing of the approvals for the 2011 General Rate Case and the Gas Transmission and Storage Case, as discussed above. In addition, $0.09 per share of the decrease is due to incremental spending on operational improvements being made across the utility, in keeping with previously announced plans for 2012, and $0.06 per share of the decrease is due to a greater number of common shares outstanding. These items were partially offset by a $0.05 per share increase due to additional revenue from capital investments authorized by the California Public Utilities Commission, and a $0.02 per share increase for smaller items.
2012 earnings guidance
PG&E Corporation is maintaining its previously issued 2012 guidance range for non-GAAP earnings from operations of $3.10 to $3.30 per share. This range previously assumed $200 million of incremental spending on operational improvements across the utility, which is now expected to be approximately $250 million. However, the increase in the spending level is expected to be offset by other factors.
Reflecting the additional $80 million accrual for third-party liability during the quarter and the $25 million of insurance recoveries, 2012 GAAP earnings guidance is now updated to $1.83 to $2.41 per share, compared with the previous range of $1.80 to $2.49 per share.
The company’s range for 2012 pipeline-related costs is unchanged at $450 million to $550 million pre-tax. The company’s updated range for third-party liability claims this year is $80 million to $225 million pre-tax. The low end of the range for 2012 now reflects the $80 million accrual in the second quarter and corresponds to the total accrual of $455 million since the accident. The high end of the range for 2012 is unchanged and corresponds to the upper end of the range for third-party liability claims since the accident, which remains at $600 million.
Guidance is based on various assumptions, including the level of capital expenditures, authorized rate base and return on equity. In addition, it assumes that PG&E Corporation will issue approximately $700 million of common stock in 2012 consistent with the company’s capital expenditures, pipeline-related costs, and other factors described above. Approximately $570 million of equity has been issued through the second quarter. Guidance does not include any potential future insurance recoveries or penalties (other than those already accrued) or any potential punitive damages.
PG&E Corporation discloses historical financial results and provides guidance based on “earnings from operations” in order to provide a measure that allows investors to compare the underlying financial performance of the business from one period to another, exclusive of items that management believes do not reflect the normal course of operations. Earnings from operations are not a substitute or alternative for consolidated net income presented in accordance with GAAP (see the accompanying tables for a reconciliation of results and guidance based on earnings from operations to results and guidance based on consolidated net income in accordance with GAAP).
2013 and 2014 financial profile
In conjunction with its results and guidance, PG&E Corporation is also providing information on certain factors that will affect financial performance in 2013 and 2014. These include the company’s capital expenditures, the level of authorized rate base upon which the company earns a return, its authorized return on equity, operational spending levels, issuance of additional equity and other factors.
The company’s earnings per share in 2013 and 2014 will depend on the resolution of various regulatory and legal proceedings related to its natural gas pipeline operations, the outcome of the 2013 Cost of Capital proceeding, and the outcome of the 2014 General Rate Case. The company is seeking recovery of a significant portion of its planned gas pipeline costs in its Pipeline Safety Enhancement Plan, but will continue to absorb costs for certain work outside the scope of the plan in 2013 and 2014. In addition, the company expects future incremental equity needs will be significantly higher than would be satisfied by its 401k and dividend reinvestment plans as a result of higher capital expenditures, year-over-year changes in cash flows, the potential expiration of bonus depreciation, future unrecovered gas pipeline costs, and other factors.
Supplemental financial information
In addition to the financial information accompanying this release, slides for today’s conference call with the financial community have been furnished to the Securities and Exchange Commission and are available on PG&E Corporation’s website.