California’s Clean Energy Policies Support PG&E’s Growth Outlook

Business Strategy & Outlook

PG&E emerged from bankruptcy in July 2020 after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs, but PG&E exited with bondholders made whole and shareholders still in control. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 9% annual growth. After suspending its dividend in late 2017, PG&E is well positioned to reinstate it in 2024 based on the bankruptcy exit plan terms. California’s utility ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. The California regulators will support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizes its economy. PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since PG&E’s bankruptcy have reduced the company’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe has a tall task mending PG&E’s relationship with customers, regulators, politicians, and investors. The $59 billion bankruptcy was PG&E’s second in 20 years and likely its last. The 2020 bankruptcy exit terms all but guarantee a state takeover if PG&E has any safety or operational missteps. PG&E is still under court and regulatory supervision following the 2010 San Bruno gas pipeline explosion. The fines and penalties from the San Bruno disaster and allegations of poor recordkeeping resulted in $3 billion of lost shareholder value.

Financial Strengths

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did enter bankruptcy in line with its regulatory allowed capital structure. Many of the same bondholders hold PG&E’s $38 billion of new or reinstated debt. PG&E will use securitized debt to eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The PG&E to maintain investment-grade credit ratings with EBITDA/interest coverage near 5 times. State legislation in 2019 will help mitigate some of PG&E’s fire-related risks and support investment-grade credit ratings. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 438 million shares, or 22%, and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust has sold 100 million shares as of May 2022 and now owns about 15% of the company. The PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. The PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. Before PG&E cut its dividend in late 2017, as an anticipated 6% annual dividend growth, in line with earnings growth. PG&E went six years without a dividend increase following the 2010 San Bruno gas pipeline explosion.

Bulls Say

California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting.
Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies.
State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Description

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(Source: Morningstar)

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