Executive Summary / Key Takeaways

• PG&E Corporation (PCG) and its utility subsidiary, Pacific Gas and Electric Company, are undergoing a significant transformation, focusing on enhancing safety, improving operational efficiency, and enabling California's clean energy transition through strategic infrastructure investment.
• The company has demonstrated tangible progress in wildfire risk mitigation through layers of physical protection and operational improvements, supported by legislative frameworks like AB 1054, which also provide financial risk mitigation and liquidity access.
• A core strategic pillar is the "Simple Affordable Model," aiming to stabilize customer bills while executing an industry-leading $63 billion capital investment plan through 2028, driven by operational efficiencies (exceeding O&M reduction targets) and beneficial load growth.
• Significant opportunities lie in serving growing electrification demand, particularly from data centers and electric vehicles, which management projects can contribute to customer affordability by offsetting infrastructure costs.
• While progress has been made towards achieving investment-grade credit ratings, uncertainties remain regarding wildfire liability resolution and regulatory interpretations, posing potential risks to financial condition and cost recovery.

A Utility Transformed: Building a Foundation for Growth

Pacific Gas and Electric Company, the principal subsidiary of PGE Corporation, stands as a critical infrastructure provider for northern and central California, delivering essential electric and natural gas services across a vast and diverse territory. The company operates within a highly regulated environment, primarily overseen by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). Its recent history is notably marked by the Chapter 11 restructuring, a consequence of significant wildfire liabilities, which served as a catalyst for a fundamental shift in strategy and operational focus.

Emerging from bankruptcy in 2020, the company embarked on a deliberate path to rebuild trust and establish a new foundation centered on safety and performance. This strategic pivot is encapsulated in the "Power Pyramid" framework, prioritizing physical and financial safety, followed by customer affordability, and ultimately enabling a decarbonized energy future for California. The "Simple Affordable Model" and the "Performance Playbook," underpinned by a "Lean Operating System," are the operational engines driving this transformation, aiming to deliver consistent results for both customers and investors.

A key differentiator in the company's strategy is the deployment of advanced technology to enhance safety and operational efficiency. Initiatives like Enhanced Powerline Safety Settings (EPSS) and strategic Public Safety Power Shutoffs (PSPS), informed by sophisticated weather stations and risk modeling, have demonstrably reduced utility-caused ignitions and acres burned, even under challenging conditions. The integration of AI-enabled cameras provides rapid ignition detection, automatically alerting first responders, a significant improvement over traditional methods. Furthermore, system hardening efforts, including undergrounding and deploying covered conductor, are critical components of the long-term risk mitigation strategy, aiming for permanent risk reduction in high-threat areas. Management highlights that a third-party assessment using the Moody's RMS wildfire model estimates a 93% reduction in the risk of economic loss from wildfires due to these mitigations, underscoring the tangible impact of these technological and operational advancements.

Within the competitive landscape, PCG-PA operates alongside other large investor-owned utilities in California, such as Edison International (EIX), and competes more broadly with national peers like Duke Energy (DUK), Southern Company (SO), and NextEra Energy (NEE). While PCG-PA benefits from its established infrastructure and regulatory licenses, providing a degree of market insulation and supporting its net margin (10.6% TTM), it has historically lagged some peers in growth trajectory and certain efficiency metrics. For instance, its capital to expense ratio of 0.9 trails the peer average (1.4-1.6) and best-in-class utilities (above 2), indicating a significant opportunity for improvement through its Lean operating system. Compared to a renewable-focused peer like NEE, PCG-PA's diversified generation mix offers greater reliability in mixed-energy grids, although NEE may hold an edge in renewable technology efficiency. PCG-PA's strategic focus on leveraging technology for safety and efficiency, coupled with its unique position in the growing California market, represents its path to differentiate and improve its competitive standing.

Performance, Investment, and Outlook

The company's recent financial performance reflects the ongoing execution of its strategic priorities. For the three months ended March 31, 2025, the Utility reported operating revenues of $5,983 million, a 2.05% increase from $5,861 million in the same period of 2024. This growth was primarily driven by interim rate relief from recent regulatory proceedings (2023 WMCE, WGSC), revenues associated with Diablo Canyon Power Plant (DCPP) extended operations, and increased electricity procurement costs passed through to customers. Operating and maintenance expenses saw a modest increase, influenced by the same interim rate relief and DCPP costs, partially offset by lower winter storm response costs and the timing of deferred expense recognition. Wildfire-related claims, net of recoveries, increased significantly in the first quarter of 2025 due to a $50 million charge related to the 2019 Kincade fire.

Despite some timing impacts in Q1 2025, management reaffirmed its full-year 2025 core earnings per share guidance range of $1.48 to $1.52, representing a 10% increase from the actual 2024 result of $1.36 per share. The EPS growth guidance of at least 9% annually for 2026 through 2028 was also maintained. This outlook is underpinned by the company's robust $63 billion capital expenditure plan through 2028, focused on essential distribution and transmission infrastructure investments necessary for safety, reliability, and growth. Management estimates 2025 capital expenditures to be $12.9 billion.

A key driver for future affordability and growth is the increasing demand for electrification across California. The company is actively pursuing "beneficial load growth" from sources like electric vehicles and building electrification, but particularly highlights the significant opportunity presented by data centers. The formal application pipeline for data center load has grown to 8.7 gigawatts as of the Q1 2025 call, with 1.4 gigawatts already in final engineering and projected to come online as early as 2026. Management estimates that for every gigawatt of new electric demand from data centers, customers may save between 1% to 2% on their electricity bill, creating headroom for necessary grid investments while potentially lowering overall costs for existing customers.

Financing this substantial capital plan is critical. PGE Corporation has completed the planned equity financing for the 2024-2028 period. The company relies on a balanced financing strategy utilizing retained earnings, equity contributions, long-term debt (including first mortgage bonds and secured debt), and access to credit facilities. As of March 31, 2025, total liquidity stood at approximately $8.0 billion.

The company is actively working towards achieving investment-grade credit ratings at the parent level, viewing this as a pathway to reduce financing costs and enhance customer affordability. While progress has been made, including reaching a mid-teens FFO to debt target in 2024 and receiving positive outlooks from rating agencies, achieving full investment grade is contingent on continued performance and regulatory clarity, particularly regarding wildfire risk.

Risks and Competitive Dynamics

Despite significant strides in risk mitigation and financial restructuring, PCG-PA faces ongoing challenges. The potential for future wildfires remains a material risk, exacerbated by climate change and environmental conditions. While the AB 1054 framework provides mechanisms for cost recovery and liquidity through the Wildfire Fund, uncertainties persist regarding the fund's long-term sufficiency, the interpretation and application of the revised prudency standard by the CPUC, and the potential for liabilities to exceed available recoveries. As of March 31, 2025, the company carried substantial liabilities for past wildfires ($1.27 billion for 2019 Kincade, $1.93 billion for 2021 Dixie, $100 million for 2022 Mosquito, before recoveries), and the full scope and cost of potential future claims remain uncertain. Litigation related to past events and ongoing investigations also pose potential financial and reputational risks.

Regulatory proceedings, while often constructive, introduce uncertainty regarding the timing and amount of authorized cost recovery for capital investments and operating expenses. Delays in decisions or disallowances could impact financial results and liquidity. Tax matters, such as the deductibility of certain past costs, also present potential liabilities. Environmental remediation obligations at various sites, including former gas plants and compressor stations, represent significant long-term costs, although a portion is expected to be recoverable through rates.

In the competitive arena, PCG-PA's ability to execute its capital plan efficiently and manage costs will be crucial. While its regulatory moat provides a degree of protection, other California utilities like EIX face similar operating environments and are also investing heavily in grid modernization and clean energy. National peers like DUK, SO, and NEE, while operating in different regulatory landscapes, offer benchmarks for operational efficiency (e.g., capital to expense ratios) and strategic focus (e.g., NEE's leadership in renewables). PCG-PA's success in leveraging its Lean operating system to drive O&M savings and improve its capital efficiency relative to peers will be key to delivering on its affordability goals and enhancing its competitive position. The pursuit of beneficial load growth, particularly in high-demand areas like Silicon Valley, represents a significant opportunity to leverage its existing infrastructure and potentially gain a competitive edge in serving the evolving energy needs of the digital economy.

Conclusion

PGE Corporation and Pacific Gas and Electric Company are actively engaged in a multi-year transformation aimed at fundamentally improving safety, operational performance, and financial health while supporting California's ambitious clean energy goals. The strategic focus on physical and financial risk mitigation, coupled with a disciplined approach to capital investment and cost management through the Simple Affordable Model and Performance Playbook, forms the core of the investment thesis. Tangible progress in reducing wildfire risk, exceeding O&M savings targets, and growing operating cash flow demonstrates execution capability.

The outlook is anchored by a substantial capital plan and projected EPS growth, driven by necessary infrastructure upgrades and the promising opportunity presented by beneficial load growth from electrification. While significant risks related to wildfire liability, regulatory outcomes, and litigation persist, the established legislative frameworks and the company's proactive mitigation efforts provide layers of protection. PCG-PA's competitive positioning is being shaped by its ability to execute efficiently within the California regulatory environment and leverage technological advancements to enhance safety and serve growing demand. The successful navigation of these dynamics, particularly achieving investment-grade credit and demonstrating sustained affordability for customers, will be critical in realizing the full potential of this transformed utility and delivering consistent, predictable results for investors.