PG&E Corporation (PCG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the PG&E Corporation Investor Update Conference Call. [Operator Instructions] Please note we have allotted 40 minutes for this conference call. Thank you. I would now like to turn the conference over to Jonathan Arnold, Vice President of Investor Relations. Jonathan, please begin.

Good morning, everyone, and thank you for joining us for PG&E's Investor Update. Before I turn it over to Patti Poppe, our Chief Executive Officer; and Carolyn Burke, our Executive Vice President and Chief Financial Officer, I should remind you first that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's presentation. Our presentation today also includes a reconciliation between non-GAAP and GAAP financial measures. The slides, along with other relevant information, can be found online at investor.pgecorp.com. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe.

Thank you, Jonathan. Good morning. Our update today comes on the heels of a busy California legislative session culminating in the passage of Senate Bill 254. The bill was signed into law by Governor Newsom on September 19 and went into effect right away. The actions taken by our state this legislative session show that they appreciated the urgent need to improve upon the framework originally adopted under AB 1054 in 2019. SB 254 provides important protections today and lays the foundation for a second phase as the state has acknowledged that the utilities and their customers cannot continue to carry the full burden of climate-driven catastrophic wildfires, especially when the utility has acted prudently. The important enhanced financial measures and the state's commitment to a meaningful second phase were the critical elements of the bill, which we and our Board weighed before deciding to opt into the fund extension. We plan to make this election this week. In terms of financial measures, SB 254 creates the framework for a new $18 billion continuation account available to cover future fires. Extending the fund provides 3 key benefits. First, it provides for timely compensation for future wildfire victims. Second, it allows for smoothing the bill impact on utility customers. And third, it builds on the investor protections of a disallowance cap. In addition to providing for the new continuation account, SB 254 includes several changes versus the original AB 1054, which we view as constructive. To start, utilities are not required to provide any large upfront contributions and a portion of the utility funding is under a contingent call, meaning it will only be required in the event of a new covered wildfire and if the administrator sees a need for cash to settle claims above and beyond available resources. Critical to upholding the principles of inverse condemnation, these contributions made by the utilities to the continuation account have value, meaning they can be credited against a future disallowance and requirements to reimburse the fund if were later found imprudent. Next, PG&E's share of contributions to the Continuation Account is just under 48%. So our annual contribution will step down by 25% from $193 million to $144 million per year starting in 2029. And the disallowance cap calculation has been clarified to reflect 20% of T&D rate base equity as of the date of ignition rather than the date of the disallowance decision several years into the future. With our growing rate base, this is a meaningful change. The state also took an important step forward in providing for a securitization option for fires with ignition dates in 2025 prior to the effective date of the new bill. This credit supportive provision allows for securitization of wildfire claims before the CPUC prudency review. While this provision is not directly impactful to PG&E, it's a helpful signal that the state appreciates the need for the investor-owned utilities to have a ready source of liquidity beyond the available fund resources. SB 254 also took one step toward limiting liabilities, introducing a Right of First Refusal for subrogation claims, giving the utilities an option to purchase claims from insurance companies at the same price as a third party would be willing to pay. SB 254 sets a clear path for the legislature to consider more comprehensive wildfire reform in the 2026 session. With the immediate need to address this legislative session, our attention has already shifted to the second phase. Specifically, the fund administrator is charged with studying and making recommendations to the legislature and the governor. The list of 10 focus areas includes considering new models to socialize liabilities from wildfires, including changes which potentially could supersede the current Wildfire Fund construct. We're encouraged by the comprehensive nature of this language. We're also encouraged by comments made by senior members of the legislature and the governor's office, both prior to and after the bill's passage. We are confident that this sets the stage for action in 2026. As you know, SB 254 calls for securitization of $6 billion of fire risk mitigation capital. PG&E's portion is approximately $2.9 billion, which will apply to wildfire mitigation capital expenditures approved by the CPUC on or after January 1, 2026. This dollar figure is much less than the earlier drafts and allows us to continue important risk reduction work at pace. The devastating wildfires in January took us all by surprise, and the state took constructive action that protects victims and customers and recognizes the importance of healthy investor-owned utilities. We look forward to working with them on phase 2 of SB 254. Now let's talk about the extension of our simple affordable plan. As I've shared with many of you, I started 2025 with a lot of optimism. This is the year we prove out the simple affordable model with our 2027 general rate case filing. This is the year we show customers that rates are going down, and this is a year to focus on serving our large load customers and enabling rate-reducing load growth. I'm happy to report that while many have been focused on the California legislative process, my PG&E coworkers have been busy executing, making these plans a reality and leveraging our performance playbook to deliver consistent outcomes for customers and investors. First and foremost, we are a company of operators, and we get up every morning to serve, putting customers at the heart of everything we do. We also know that performance is power and have built our work plan and financial plan knowing that when we perform, we will have the power to influence perceptions and outcomes. The plan we're sharing today is the plan we believe best delivers for customers and investors now and for the long run. At the same time, I want you to know that we hear your thoughts on capital allocation. If PG&E stock continues trading at depressed levels, and we aren't seeing clear signs of progress toward meaningful policy reform, then we would certainly consider reallocating some capital toward more immediate shareholder return, always being mindful of our credit metrics. The most likely way we would do this is through an opportunistic stock repurchase for which I would not hesitate to seek the appropriate authorization from our Board if conditions warrant. But first, let me reiterate, this would not be our preferred path. We prefer to keep investing in safety and resiliency for our customers, enabling rate-reducing load growth, which will drive the state's leadership in the macro trend of AI and electrification and ultimately helping our state meet its ambitious clean energy goals affordably. With the fund administrator report due next April, another rate reduction this month, our brand trust scores on the rise, customer bills projected to be flat to down in 2027 versus today and a robust data center pipeline, we're positioned to deliver for California, our customers and you, our investors. As part of our 5-year plan, we will continue important wildfire mitigation work, including undergrounding. We will prepare the grid to serve new homes, businesses and electric vehicles. We will continue to invest in the safety of our gas system with pipeline replacement, and we will invest in more rate-reducing load with incremental FERC transmission capital now in the plan. Completing this and other important work for our customers translates into average annual rate base growth of approximately 9% for 2026 through 2030, which in turn supports extending average annual core EPS growth of at least 9%, also through 2030. Our simple, affordable plan contemplates our share of the securitized utility capital investment under SB 254. It is built to not require new PG&E common equity through 2030, while also delivering customer bill increases well below inflation. With that, I'll turn it over to Carolyn to discuss more specifics of our extended 5-year plan.

Thank you, Patti, and good morning, everyone. Today, I'm happy to reiterate our 2025 non-GAAP core EPS guidance range of $1.48 to $1.52 with a bias to the midpoint. That's up 10% over our 2024 result. I'll provide core EPS growth guidance of at least 9% each year, 2026 through 2030, share the details of our capital plan, which includes average annual rate base growth of approximately 9% for 2026 through 2030 and offer our financing guideposts, including that our plan does not require new common equity through 2030, a key consideration given where we currently trade. Turning to Slide 6. We intend to invest approximately $73 billion over the 5-year period. This is a combination of CPUC and FERC's jurisdictional capital and includes the $2.9 billion of CapEx to be securitized under SB 254. Additionally, we will be guided by the following key financing principles as we move forward. First, we will continue to prioritize investment-grade ratings with IG being one of the most meaningful potential affordability enablers for our customers. Our plan maintains FFO to debt in the mid-teens, and I'll remind you that FERC jurisdictional capital converts more quickly into operating cash flow through our annual formula rate. S&P made a recent decision to maintain our positive outlook, and they too are looking to the second phase of wildfire legislation. Meanwhile, just this past Friday, Fitch upgraded our parent corporate credit rating to investment grade with similar comments on the importance of further wildfire policy reform. Second, we continue to plan conservatively. This includes having contemplated the possibility that the Wildfire Fund Administrator may or may not call for contingent shareholder contributions within the plan period. Third, we're updating a legacy commitment to pay down $2 billion of parent debt. At this stage, we believe we have grown into our current level of parent debt, which stands at about 10% of total debt. That compares to a peer average of around 25%. And lastly, we're sticking with our plan to target a dividend payout ratio of 20% by 2028. We target reaching this level on a linear basis and holding there through 2030. We still see 20% as an appropriate and conservative goal, offering financing flexibility over the course of our plan. These guidelines are in addition to other operating levers that we work every day, such as reducing nonfuel O&M by at least 2% and improving our capital to expense ratio. I am excited about this plan and what it can deliver for our customers and you, our investors. It's grounded in our brand of conservatism and will be executed using our winning performance playbook. As Patti mentioned, though, I too want to assure you that we intend to maintain discipline when it comes to capital allocation, staying mindful of ongoing regulatory and legislative outcomes included, but not limited to, progress towards a successful phase 2 of wildfire reform in our state. With that, I'll hand it back to Patti.

Thank you, Carolyn. We're looking forward to connecting you -- connecting with many of you here in New York this week. And with that, we'd be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Shar Pourreza with Wells Fargo.

So I just appreciate the color this morning. Just as we focus on capital allocation, what is your '23 financing plan embed beyond the 20% dividend payout by '28? And what would be the time frame for you to seek Board approval for buyback flexibility? Do we need to wait until the end of the '26 legislative session for that?

Thanks, Shar. Well, first, obviously, as we said, we're focused on value now and the long term. It's really important to know that our primary focus is investing our capital for the benefit of customers. We think that's the right near-term and long-term approach. However, we'll obviously continue to monitor the stock price and the state actions and attention during SB 254 phase 2. There are conditions that we would consider a buyback given the equity we issued that equity to fund our plan through 2028. And given the securitization of CapEx, that could be the equivalent of about $1 billion of -- maybe $1.5 billion on the high end of a buyback. But really, we're focused on our credit metrics and delivering for customers. And so we think in the near term, that's really the best plan. I'll have Carolyn hit the high points of the financing plan over that period.

Yes. I'll just say that as we've said, we've always built our financing plan, first and foremost, to focus on our balance sheet and maintaining FFO to debt in the mid-teens. That's a core principle. Maintaining our dividend at 20% through 2028 and sticking to it through 2030 generates a lot of internal equity, and that provides us with additional flexibility. If we need any other sort of financing, but you just can always count on us to look at the most efficient form of financing as we've done in the past, Shar.

Got it. Okay. That's perfect. And then just lastly, can you just elaborate on any further offsets to new shareholder contributions relative to plan?

Maybe you can -- other offsets, what do you mean by that, Shar? Maybe you can just give me a little color, so I can...

Just how do you mitigate shareholder contributions relative to what you have in plan there?

Well, I was just going to say -- as we said, we've built our plan to contemplate the contingent cost. And so to the extent that it's not, that would -- we consider that upside. Just...

And I'll just add in that, obviously, our simple affordable model is what drives the whole financial plan. So the offsets, obviously, significant O&M savings that we've continued to build into the plan now and for the future provide ongoing benefits, both for customers and for the financial plan.

Your next question comes from the line of Anthony Crowdell with Mizuho.

I guess just more on the legislative front. I'm curious, it was a very productive legislative session, but is there anything you didn't get or anything you guys may plan next year?

Well, I think Anthony -- great to hear your voice, Anthony, this morning. We are obviously focused on phase 2. There's much yet to be done. The whole idea that we reduce claims through multiple measures, number one, just hardening the system and support for hardening and support for both our infrastructure hardening and community hardening. We invest a lot of effort and money into preventing an ignition. We also need to, as a state, invest in community hardening and preventing the spread. And so that's obviously a key part of phase 2. And the liability reform, we'd love to see additional liability reform as part of phase 2 and then broadly a larger pool to socialize cost. I think one of the things that's important, and we definitely have heard this from legislators and state leaders, wildfire and extreme climate conditions have continued impact on California's livability on California's housing crisis. We need to have insurable homes for people to be able to get a mortgage and buy a house in California. So these climate risks are adding to the housing crisis. So phase 2 really is an opportunity to open the aperture, look for additional means of insurability for the state for, again, as I mentioned, community hardening and really looking at limitations on claims to protect customers, particularly when a utility has been prudent. We don't want customers to continue to bear an overreliance on those claims. And so I think claims reform is an important part of phase 2.

Great. And then if I could just -- I believe you have -- administrative recommendations are due April 1, whatever the recommendations are, could you just talk about how it goes from recommendation to -- does it then come up to law? Does it come up in the legislative session then that would start? I believe it starts in May. Like just, how does it go from recommendation to law? And that's all I have.

Yes. I mean, I think some of that will materialize over time. But just like our regular legislative session, lots of ideas hit the tape in the beginning of the year. And so this report coming out in end of March, by April 1, will provide the framework then and legislative leaders will then need to do the work to take those recommendations and convert them into legislative proposals that will then subsequently be voted upon through the rest of the legislative session.

Your next question comes from the line of Ryan Levine with Citi.

How does the $6 billion provision of SB 254 or from a company perspective, $2.9 billion impact the financing plan? And can you kind of talk through the implications there, both in the plan and how that could evolve?

We have included the full $2.9 billion in our $73 billion -- in our $73 billion 5-year plan. So we -- and as we've just laid out, we feel very comfortable that we don't need any further equity to support that. The securitization occurs throughout the plan, throughout the 5-year plan. That's really going to be -- the exact timing of that will really be dependent on our final GRC approval.

Okay. And then procedurally, given the comments about seeking Board approval for the share repurchase, is there -- I think Shar asked about kind of time line, but is there any color you could provide around how you would look to structure that if you go in that direction? Are you thinking more opportunistic? Was that the thrust of the comment that Patti had made?

Yes. Ryan, this is Patti. I would say it's too soon to say. We've not gone to the Board for that approval yet because we really feel like our go-forward plan serves the best value now and in the future, but we'll obviously be mindful as conditions take shape as we head into next year if we need to take different actions.

Your next question comes from the line of Carly Davenport with Goldman Sachs.

Maybe just on the new capital plan, the mix between FERC and CPUC CapEx shifting a bit here. Just curious if there's an optimal mix there that you target or maybe how much incremental flex there could be to prioritize FERC investments to the extent that the state environment is more challenged?

Yes. So you'll note in our plan, we're starting to see a good uptick in our FERC-regulated transmission investments. And I want to make sure it's clear that very little of that actually is any kind of beneficial load growth data center transmission CapEx yet. We need to continue to move that work through our cluster studies. And so what you're really seeing in that plan is already -- what I would describe as bread-and-butter transmission investments that, frankly, we've been working and waiting to build into the plan. And with this 5-year look, we now are able to increase that transmission investment, including, again, as I said, bread-and-butter substation transmission upgrades, good maintenance as well as CAISO-approved transmission projects. We have a big project in Oakland that was CAISO awarded. So there's a lot of certainty to that FERC investment. And like all of our CapEx plan, there's always internal competition for what's the highest value capital to be deployed at the lowest cost for customers that provides the most benefit -- and we're excited to be able to start to pull in that FERC CapEx. So much less driven by the appetite for capital from the CPUC and more driven by the needs of our customers and the needs of the system, and we're excited to be able to pull in that transmission work. There's lots to be done. And as we've said, we still have at least $5 billion of incremental CapEx that we would love to pull into the plan if we were ever able to. But we feel like this is the sweet spot of capital deployment at the lowest cost for customers and keeping in mind our balance sheet and our credit metrics.

That's great. And then maybe just thinking about the simple affordable model, if I recall, you had some upside levers around things like O&M load growth. I think you've already touched on the O&M piece. Is the load growth embedded in this plan still that 1% to 3% range? Or is there any upside that you've now baked into this revised plan?

Yes. We're keeping it in the 1% to 3% for now. As we complete the cluster studies, both -- we've shown 1.5 gigawatts of applications in our final engineering in our first cluster study, where we see about 3.3 gigawatts of moving through our second cluster study. As those projects get to interconnection requests and final signed contracts, then we'll start to pull in that load. But we're trying to be very conservative on our load growth estimates so that we can have an accurate and conservative forecast. But another big driver, Carly, in our simple affordable model is more efficient financing. That's why our emphasis on investment grade continues to be a real drumbeat. We know that those credit metrics are essential to lowering cost for customers. And so efficient financing will continue to add value for customers as we continue to gain the confidence of the credit agencies.

Your next question comes from the line of Steve Fleishman with Wolfe Research.

So just how are you thinking about cost of capital outcome in context of the plan and just managing around that?

Yes. Obviously, we feel like, Steve, we've made a really strong case for our cost of capital filing. That proceeding obviously will take through November, and we hope to be able to implement then that whatever the revision to cost of capital is in January procedurally. Look, we do think that our actual cost of capital has gone up given the conditions here with the wildfires in January and the reaction from the markets and our credit metrics. So we feel like we've made a strong case. Obviously, the commission will make the final determination.

Okay. And then just on the stage 2, like is there any better -- like is anything going to happen this year on this? Or are we really going to ramp up next year? When are we going to get a better sense of the process for that?

It's a great question, Steve. I think some of that is still materializing. We look forward to hearing from, obviously, Ann Patterson at your conference as well as from the governor's office about what their plan is and how the process will take shape. And I'm not sure how visible and public it will be through that April report, but you can be sure behind the scenes, we'll be working to provide important insights and contributions. And our team is definitely in full speed ahead working on making sure we're providing the best and most robust input to the process. But it may be very quiet between now and April 1 or there may be key milestones that's going to have to be for the governor's office to clarify.

Your next question comes from the line of Aidan Kelly with JPMorgan.

Yes. So just with the capital plan now rolled forward to 2030, could you speak to when you might be able to realize the identified $5 billion in additional CapEx opportunities at this point in time? And then just like on the funding side, is there any kind of considerations for that incremental CapEx?

Yes. As we said -- as we look at that additional $5 billion of capital, as we've said, there's a number of ways that we could bring that into the plan. We could simply add to the plan or we could look at each of those projects and how they impact affordability. And so we may upgrade our capital plan by replacing some of that -- those $5 billion projects with some projects that are currently existing in the $73 billion or we could, again, continue to extend the duration of our plan. So we've got a number of ways of looking at that $5 billion and how we would bring it in. And we're always working it, to be quite honest. There are always new opportunities coming. And as Patti said, we -- our capital -- all our projects compete for capital. And we look at what is the most affordable for our customers and makes the most sense for our strategy.

And just to make sure it's clear, we have added -- we brought some capital into the plan. That's why we've rolled it forward for 5 years. We brought some of that $5 billion in and continue to have at least $5 billion more to contribute to the benefit of our customers. And so the one thing that I hope people really understand is our system has a lot of opportunities for, again, bread-and-butter capital deployment for the benefit of customers. And much of that CapEx is rate reducing CapEx. When we are able to prevent the band-aiding and the maintenance of the system and rather rebuild it to modern standards given its age and condition, that is good for customers. It helps to lower rates while we're investing in meaningful CapEx for customers. So we've got a lot of appetite for capital out here in California. We've got a lot of appetite on our system, the at least $5 billion. Again, we'll be disciplined about that. Carolyn has been clear that we've got real firm guidelines, but our customers have a lot of work for us to do, and we look forward to doing that in a way that helps to lower rates and really deliver value for customers.

Got it. Appreciate the color there. And then just looking kind of at the upcoming CEA report this April, in your slides, you kind of highlight -- Physical Mitigation and Community Impact is one area of it. Maybe just high level, curious, how much upside for risk improvement do you see kind of versus your current mode of operating at this point in time? Do you see this more kind of catered to the local communities at this level? Or just any commentary on that would be great.

Yes. I think one of the important things in the phase 2 report will be the importance of communities preparing to prevent the spread of wildfire. And for the state to work with the communities, and obviously, we'll be a key part of that, to make sure that our communities are prepared for this climate hazard that exists around us. As we continue to reduce our ignitions, and I'm proud to report our ignitions this year are at the lowest level in recent tracking, even given extreme conditions around us, we know that ignition prevention is one thing, but spread needs a lot of focus. And we know that CAL FIRE is the best in the business. But in between preventing an ignition and fighting a wildfire with our high-quality, high effective firefighting resources, there's a need to harden homes and communities, make them defensible so that spread is not such a risk. And that's what will help fix the housing crisis in California and the insurability crisis in California. So as we look to phase 2, it's all about opening the aperture, looking at the societal issue that exists, and we will obviously be a key part of working on that, but there's a lot more to it than utility-caused ignitions. And I think that's the recognition that the situation in L.A. this year helped to really illuminate.

Your next question comes from the line of Paul Fremont with Ladenburg Thalmann.

Going back to the cost of capital, I guess a couple of questions. The yield spread adjustment that you guys are asking for, I think the interveners have -- are objecting to that. Any thoughts there as to how investors should think about that?

Well, we think -- as we put it into our filing, we think it makes sense. I will say that the importance -- the most important thing that we think about is, again, we're very focused on getting our IG ratings and limiting the difference between what we're seeing and as we offer our short term -- as we offer our short-term debt by focusing on our IG ratings. And so that would be continue to -- the difference there will continue to decrease. But at this point in time, I mean, it is a difference, and we think that's the right way that we should be compensated in the cost of capital. But again, I'll just remind you that we're not necessarily counting on that in our plan.

And then one other question on the cost of capital. Obviously, you guys are looking sort of at increased risk in terms of what you're asking for with respect to ROE and equity ratio. But the interveners, I think, are sort of focusing on affordability and their testimony as to why they think -- why they're recommending lower equity ratios and lower ROEs. Given sort of the legislative -- legislature focus on this whole affordability issue, how do you think the commission sort of balances those 2 objectives?

Well, I think 2 things here, Paul. One, the commission has been clear that the cost of capital application and cost of capital process is not the vehicle to manage affordability. And frankly, the best way to manage affordability is the work that we're doing that lowers costs for customers. And so we're working on affordability. Our rates are down this year. Our rates are forecast to go down again yet this year and then down again next year. In the face of the national trends, we're proud that we have turned the corner there, and we continue to see capability of lowering rates through our simple affordable model, reducing O&M at industry-leading levels, continuing to improve our efficient cost of financing, we know as our credit metrics improve. So we say all that to say the cost of capital should be a technical correction, and there's a process for it, and we are confident that the commission will use the process as it's intended and yet we still plan conservatively. We're not assuming large or significant cost of capital improvements. We're going to continue to plan conservatively, though we think our application absolutely warrants the improvements on the cost of capital.

And that concludes our question-and-answer session. And I will now turn the conference back over to Patricia Poppe, Chief Executive Officer, for closing comments.

Thank you, Krista. Thank you, everyone, for joining us. We are very much looking forward to serving our customers better every day, and that is the path -- and the best path to deliver increasing value and consistent financial performance for you now and in the future. Thanks for joining us today. We'll see you here in New York.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.