PCG - PG&E Q3 Earnings: Steady Report But Debt Looms Over

2023-10-26 09:00:35 ET

Summary

• PG&E Corporation Q3 results missed estimates for non-GAAP EPS but beat estimates for revenue.
• The company reported nearly $22 billion in annual revenue in 2022 and is one of the 6 regulated Investor Owned Utilities in California.
• PG&E achieved a 94% reduction in wildfire risk and reached its core earnings goal to become eligible to pay dividends.
• Debt and expenses are to be tracked lower before PG&E Corporation stock becomes an outright buy.

PG&E Corporation (PCG) has just reported its Q3 results, as Seeking Alpha has covered here . Non-GAAP EPS of 24 cents missed estimates by a cent while revenue of $5.89 billion beat estimates by $410 million. This article dissects the company's Q3 earnings in the latest version of The Good, The Bad, and The Ugly. Let us get into the details.

What Does PG&E Do?

Pacific Gas And Electric Corporation, known as PG&E Corporation, is an Electric and Gas utility company that was founded in 1905. The centenarian provides services to more than 5 million households and 16 million people in the state of California. The company reported nearly $22 billion in annual revenue in 2022. and is one of the 6 regulated Investor Owned Utilities [IOU] in California. You may recall that PG&E had to pay $55 million for its role in the California wildfires a few years ago.

In what has generally been a bad year for utilities stocks, PCG has bucked that trend as it is up 3% YTD, despite not paying a dividend. But the dividend story may change soon, as detailed below.

The Good

• PG&E Corporation's revenue grew nearly 10% YoY to make it 4 consecutive quarters with YoY revenue growth. The $5.89 billion in revenue is also the 2nd highest since at least December 2020. In particular, electric revenue went up nearly 16% YoY, and, should the trend continue, it is good news for the company heading into winter, as electric heating is generally costlier than natural gas.
• PG&E reaffirmed its guidance for FY 2023 with an EPS range of $1.19 to $1.23. That gives the stock a forward multiple of just 13, which compares favorably against all of its peers, as can be seen in the valuation section of this Seeking Alpha page. The company also remains on track for at least 9% EPS growth/yr between now and 2026.

• As mentioned in the introduction above, PG&E had to face heavy penalties and, more importantly, bad press for its alleged role in the California wildfires. Since then, without admitting guilt openly, the company has taken measures to reduce the risk of wildfire triggered by its equipment. The company reported a 94% reduction in wildfire risk, exceeding its target of 90% reduction in 2023.

• Utilities stocks are generally bought by investors for two reasons: dividend and safety. While PCG stock has avoided the 2023 utilities selloff, it has not paid a dividend yet. As part of its restructuring plan post-bankruptcy, PG&E agreed not to pay stock dividends until it reached $6.2 billion in non-GAAP core earnings. This target was achieved in Q3 2023. It remains to be seen if/when the company decides to pay a dividend, but at least reaching the eligibility threshold is good news for investors.

The Bad and The Ugly

• Natural gas revenue fell nearly 8% YoY to $1.38 billion in Q3, which is a steep fall, weather excuses notwithstanding. Overall, for the first 9 months of the year, natural gas revenue is still up 7% and the 4th quarter is likely to trend up given the approaching fall/winter weather.
• Operating and maintenance expenses went up an astonishing 40% YoY in Q3 to reach $3.1 billion in the just reported quarter. The company highlighted that this is because they had to postpone regular maintenance activities from the first half of the year due to storm response. This large expense item had a massive impact on the overall EPS, which went down nearly 20% YoY. CapEx is also projected to increase, with a wide range of possibilities between $8 billion and nearly $14 billion through 2027.

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