PG&E (PCG) probably won't go bankrupt, as it did in 2001, but the company currently faces some pretty severe financial headwinds. Investors must decide whether the negatives are already discounted into the stock price or if a period of declining profits will drag down the share price.
PG&E, formerly known as Pacific Gas & Electric, provides electricity and gas services to approximately 5 million customers in central and northern California. The company is a regulated utility whose rates are filed and approved by the California Public Utilities Commission. For the typical public utility, the local utilities commission will allow rates high enough for the company to earn a targeted return on equity or assets.
In the second quarter, PG&E received approval for a rate increase equal to a quarterly 24 cents per share increase in operating income. However, the company only managed to report net income of 91 cents per share, up 5 cents from a year earlier.
Several factors are hurting the company's ability to increase profits. The California economy has been one of the hardest hit by the ongoing slow growth. California has the second-highest unemployment rate of any state. Power and gas usage reflect stagnant economic conditions.
In September 2010, a PG&E natural gas pipeline running through a suburban San Francisco neighborhood exploded, killing nine and burning down almost 40 homes. The National Transportation Safety Board has determined PG&E was at fault for the explosion. So far the company has set aside about $270 million for the accident, but the total could run much higher as the company inspects and possibly must replace many miles of older gas pipeline.
In September, PG&E named a new CEO, Anthony Earley, formerly the CEO of DTE Energy in Detroit. Naming Earley as CEO is the first time PG&E has gone outside the company for a new top executive. The former CEO, Peter A. Darbee, resigned in April.
PG&E has frozen the dividend at the current quarterly rate of 46 cents per share. At the current share price, PG&E is one of the higher yielding utility stocks, paying investors about 4.25 percent.
Recently, the analysts at Deutsche Bank upgraded their rating on PCG to buy from hold. However, the upgrade was issued as the stock dropped to a three-year low. The share price has recovered somewhat since and is now near the Deutsche target price. The company reports next on Nov. 3.
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