PG&E Corporation (NYSE: PCG) is a utility holding company that provides electricity and natural gas services to over 16 million customers across northern and central California. With a focus on safety, reliability, and sustainability, PG&E is positioning itself as a key player in California's transition to a decarbonized energy future.

Business Overview

PG&E Corporation's primary operating subsidiary is Pacific Gas and Electric Company (the Utility), which generates, transmits, and distributes electricity and natural gas. The Utility's service area spans 70,000 square miles and includes a diverse customer base, ranging from residential to commercial and industrial. PG&E's operations are primarily regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).

PG&E has a long history dating back to 1905, when it was founded as the Pacific Gas and Electric Company. Over the years, PG&E has weathered various challenges, including the 2001 California energy crisis and the 2017-2018 wildfires that led to its Chapter 11 bankruptcy filing in 2019. However, under the leadership of CEO Patty Poppe, who joined PG&E in 2020, PG&E has undergone a significant transformation, focusing on improving safety, reliability, and financial stability.

Financials

In 2023, PG&E Corporation reported annual net income of $2.26 billion, annual revenue of $24.43 billion, annual operating cash flow of $4.75 billion, and annual free cash flow of -$4.97 billion. For the second quarter of 2024, PG&E reported earnings per share of $0.31, compared to $0.23 in the same period of the prior year.

PG&E is reaffirming its 2024 adjusted earnings guidance range of $1.33 to $1.37 per share, representing a year-over-year increase of at least 10%. PG&E also reiterated its longer-term earnings per share growth target of at least 9% annually from 2025 through 2028.

Regulatory Environment and Investments

PG&E operates in a highly regulated environment, with the CPUC and FERC overseeing various aspects of its operations, including rates, capital investments, and safety standards. PG&E has been actively engaged in several regulatory proceedings, including its General Rate Case (GRC) and the implementation of Assembly Bill 1054 (AB 1054), which established a statewide wildfire fund to help utilities manage wildfire-related liabilities.

In 2024, the CPUC approved a final decision in PG&E's GRC Phase 2, authorizing an incremental $2.3 billion of capital investment for energization projects through 2026, with the potential for additional increases in 2025 and 2026. This decision aligns with PG&E's strategy of leveraging beneficial load growth, such as from data centers and electric vehicles, to drive affordability for customers while also supporting California's clean energy transition.

PG&E's capital investment plan remains robust, with PG&E targeting $62 billion in customer capital investments over the next five years, focused on distribution and transmission infrastructure. PG&E has also identified an additional $5 billion in potential incremental T&D investments, which it plans to bring into its plan once it can ensure affordability for both customers and its balance sheet.

Wildfire Mitigation and Risk Management

Wildfires have been a significant challenge for PG&E in recent years, leading to PG&E's bankruptcy filing in 2019. However, under Patty Poppe's leadership, PG&E has made substantial progress in mitigating its wildfire risk through a multi-layered approach.

PG&E has implemented various wildfire mitigation initiatives, including enhanced power line safety settings, public safety power shutoffs, vegetation management, asset inspections, and system hardening. These efforts have resulted in a significant reduction in the number of CPUC-reportable ignitions and acres burned. Additionally, PG&E has leveraged the Wildfire Fund established under AB 1054 to help manage its wildfire-related liabilities.

As of June 30, 2024, PG&E has recorded aggregate liabilities of $1.125 billion, $1.6 billion, and $100 million for claims related to the 2019 Kincade fire, the 2021 Dixie fire, and the 2022 Mosquito fire, respectively, before available insurance and other probable cost recoveries. PG&E has recorded insurance receivables of $430 million, $525 million, and $83 million for these respective wildfire events.

PG&E's wildfire mitigation efforts have been recognized by a third-party risk assessment, which estimates that PG&E's mitigations have reduced the risk of economic loss from wildfires by 93%. This differentiated safety posture, combined with the financial protections provided by AB 1054, has significantly improved PG&E's risk profile.

Liquidity

As of June 30, 2024, PG&E Corporation had access to approximately $3.3 billion of total liquidity, comprising $1.1 billion of the Utility's cash and cash equivalents, $255 million of PG&E Corporation's cash and cash equivalents, and $2.0 billion of availability under PG&E Corporation's and the Utility's revolving credit facilities.

PG&E has a balanced and flexible financing plan in place to support its capital investment program and maintain investment-grade credit ratings. This plan includes the issuance of equity, the ramp-up of the dividend, and the pay-down of $2 billion in parent-level debt by the end of 2026.

PG&E's credit ratings have been steadily improving, with PG&E now just one notch below investment grade at both Moody's and Fitch, and on positive outlook at both agencies. PG&E remains committed to achieving investment-grade credit at the parent company level.

Operational Efficiency and Cost Management

PG&E has placed a strong emphasis on operational efficiency and cost management, with a goal of reducing non-fuel operating and maintenance (O&M) expenses by at least 2% annually. PG&E has exceeded this target in 2022 and 2023, and it is on track to meet or exceed the 2% goal in 2024 as well.

PG&E's efforts to improve efficiency are driven by its "performance playbook," which includes initiatives such as waste elimination, standardization of work, and automation. PG&E has also been focused on improving its capital-to-expense ratio, which currently stands at 0.8, compared to a peer average of 1.4 in 2022 and 1.6 in 2023. By spending more on capital investments relative to expenses, PG&E can make long-term, durable improvements to its infrastructure while keeping customer bills flat.

Growth Opportunities and Beneficial Load

PG&E sees significant growth opportunities in its service area, particularly in the technology and electric vehicle (EV) sectors. PG&E's service area includes Silicon Valley, home to many major tech companies and a hub for data centers. Additionally, California's policies are driving the need for electrification, which PG&E believes can be a key enabler for a decarbonized energy future.

As of June 30, 2024, there are over 610,000 EVs registered in PG&E's service area, up from 580,000 reported in PG&E's previous investor event. PG&E views this beneficial load growth as an opportunity to reduce the unit cost of electricity and eliminate the "green premium," making the transition to a low-carbon economy more affordable for customers.

PG&E is actively working to quantify the potential impact of data center and EV load growth on its capital investment plan and customer affordability. PG&E has initiated a cluster study to better understand the pipeline of data center demand and how it can be incorporated into its plan in a way that is beneficial for all customers.

Regulatory Relationships and Stakeholder Engagement

PG&E has placed a strong emphasis on its relationships with regulators and other stakeholders, recognizing the importance of a collaborative approach to addressing the state's energy challenges. PG&E has been actively engaged with the CPUC, FERC, and other agencies, working to align its investments and initiatives with the state's policy objectives.

PG&E's recent success in securing regulatory approvals, such as the GRC Phase 2 decision and the affirmation of its return on equity (ROE) increase, demonstrates the constructive nature of its relationships with policymakers. PG&E believes that its performance-driven approach and focus on customer affordability have been key factors in maintaining these positive relationships.

Outlook

PG&E Corporation is well-positioned to play a pivotal role in California's clean energy transition. With its robust capital investment plan, focus on operational efficiency, and commitment to safety and reliability, PG&E is poised to deliver sustainable growth and value for its customers and shareholders.

PG&E's simple, affordable model, which leverages beneficial load growth and efficient financing, provides a clear pathway for PG&E to make the necessary investments in its infrastructure while keeping customer bills in check. As the state continues to prioritize decarbonization and electrification, PG&E's strategic positioning and execution capabilities make it a compelling investment opportunity in the utility sector.