PG&E: Regulatory Proposals Suggest Constructive Outcome to 2023 Rate Review

We are reaffirming our $15 per share fair value estimate for PG&E PCG after California regulators released two proposed decisions in PG&E’s 2023-26 rate review. We are maintaining our no-moat rating. Investors should be relieved that the key debate among regulators this fall likely will be the pace of PG&E’s wildfire protection investments. This is only a small part of PG&E’s total four-year, $40 billion investment plan that we expect regulators will support. We continue to forecast 9% average annual earnings growth, one of the highest growth rates in the sector, assuming a final regulatory ruling that is mostly in line with the proposed decisions.

PG&E proposed burying 2,000 miles of electric lines in high fire risk areas during the next four years for $5.9 billion, part of its long-term plan to bury as many as 10,000 miles. The California Public Utilities Commission administrative law judges’ proposal filed Sept. 13 recommends burying 200 miles in 2023-26 and an alternate proposal from a CPUC commissioner recommends burying 973 miles. Both plans recommend PG&E install much cheaper covered conductors for the balance of the 2,000 miles. The total capital investment budget is $2.1 billion for the ALJ’s proposal and $4.27 billion for alternate proposal. We assume $4.9 billion.

Overall, the annual average rate base growth in 2023-26 is 5% in both proposed decisions, lower than our 9% estimate and the midpoint of management’s outlook. We expect regulators to approve additional investments in 2025 and beyond that are not included in this rate review.

PG&E remains on track to meet management’s $1.19-$1.23 EPS guidance for 2023, in line with our outlook. PG&E stock is among the few overvalued utilities in our coverage after rallying to $17 per share from $10 in mid-2022. We expect PG&E to initiate a small dividend as soon as next quarter. Dividend growth likely will trail earnings growth until beyond 2027.