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

Hi, and welcome to today's S&P Global's Ratings webinar. I'm Gabe Grosberg, Managing Director and Sector Lead for S&P's North America's regulated utilities practice. Today's webinar is part of a larger series featuring interviews with utility industry CFOs. The industry has never been more complicated with considerable data center expansion, robust capital spending, high cash flow deficits and wildfire risk. I, along with Gerrit Jepsen, S&P's primary analyst for PG&E and Director at S&P's North America Utilities practice will be moderating today's discussion. We are thrilled today to be joined by Carolyn Burke, CFO of PG&E. We want to thank the large number of investors who joined us on today's call. This webinar is primarily designed for our sophisticated fixed income investors. And accordingly, we will first be asking your presubmitted questions. [Operator Instructions] Carolyn, prior to beginning our discussion, I believe it is extremely important to level set with investors as to where exactly S&P stands with regard to PG&E's credit quality and wildfire risks. As you see on the next slide, California investor-owned utilities operate with considerable higher risk than most of the utilities across the U.S. The long periods of drought driven by climate change increased the likelihood of catastrophic wildfires. And under California's interpretation of inverse combination, utilities can be held financially liable for wildfires caused by their equipment regardless of negligent. We have publicly acknowledged that [indiscernible] California taking steps to reduce these risks PG&E and Edison would likely be rated in the single B category. However, California did take steps to reduce these risks including establishing a large wildfire fund and the liability cap. At the same time, as you see on the next slide, S&P Global Ratings assess that these developments as highly supportive of credit quality directly contributing to our 2-notch upgrade of PG&E over the past 30 months. However, despite California's efforts, significant risks remain. This includes the absence of an automatic replenishing mechanism for the wildfire fund. As such, as the fund depletes the credit quality of the utilities, including PG&E that rely on the fund also weakens. Furthermore, when the fund is fully depleted, utilities also lose the protection of the liability cap. These outstanding risks directly impact the credit quality of California investor-owned utilities. Because of these risks, as you see on the next slide, the ratings and outlooks for both PG&E and Edison are directly tied to the relative size of the wildfire fund. Now as you see on the next slide, if the California Earthquake Authority is correct that the Eaton Fire could deplete the AB 1054 $21 billion wildfire fund, then as you see on the bottom chart of the next slide, the wildfire fund balance will be reduced to only about $11 billion. Under such a scenario, S&P Global Ratings has indicated, that we would likely downgrade Edison to the speculative grade. And then California is 2 largest utilities that serve about 2/3 of all of California's electric customers would be rated in the speculative grade. Now getting back to recent developments, our base case assumptions for PG&E did not incorporate any potential legislative and [ Nackman ] that could reduce wildfire risk. And therefore, as you see on the next slide, when the legislation session concluded without any further wildfire reform, S&P Global Ratings affirmed our existing ratings and outlooks on both PG&E and Edison. Now Carolyn, with that brief background, PG&E did have an immediate response regarding the lack of a legislative progress. And as you see on the next slide, the company announced a new strategic review and some capital spending reductions. So Carolyn, regarding the strategic review, your CEO recently elaborated in an interview that the company could consider ring-fencing both generation and gas operations. These businesses are not exposed to wildfire risk, but are being financially impacted by their association with PG&E's wildfire exposure. So first of all, can you please further elaborate on these potential initiatives?

Yes. Thanks, Gabe. First, can I just take a minute to thank you for the invitation today. And particularly for sharing your perspective on wildfire risk and PG&E's credit. Your statement that you just made about a single B scenario in the absence of wildfire reform is really deeply concerning. And it illustrates that the status quo does not work for our customers. I just want everyone -- the listeners and you all to know that we're absolutely resolute to do what we can to support credit quality, and we're advocating for the state to take necessary action. [Audio Gap] And while it's certainly uncertain, it's highly uncertain, we're still hopeful that policymakers may act on that this year. But outside that policy reform, under our strategic review, we're going to look broadly at capital allocation and all other options. As we've said, everything is on the table to make sure that we can meet our obligation to serve the state of California in a way that is affordable for our customers. Now when we take a step back, what does that really mean? Our overall fundamental goal is to become investment grade and to be able to affordably deliver for our customers. And we have launched the review to open up that dialogue with our regulator and the state about how we can do that.

Yes. Thanks for that question, Carolyn. That's really helpful. Just as a follow-on question, why do you believe this strategy will successfully give the company's previous -- will be successful given the company's previous unsuccessful attempt to sell about 50% of its generation in 2023?

Yes. That's a good question. Maybe I'll just remind everyone, our packgen minority sale proposal was filed in 2022, and that was under very different circumstances -- the filing itself was and the objective was narrowly focused on efficient capital raising. Now today, 4 years later, we're in a very different situation. And importantly, there is a broad recognition that the status quo for us in California is completely unsustainable. And that's why we'll be engaging with regulators and other stakeholders now to identify solutions that can help address these shared challenges. So Packgen, different time, defense circumstances. And today, we'll be working with our stakeholders and our regulators upfront.

Carolyn, I appreciate that perspective. As you see on the slide here, PG&E also announced about a [ $2 billion ] reduction in its capital spending plan for 2027. So could you please provide insight as to the rationale behind this decision? What are the company's objectives in reducing capital expenditures? And should investors anticipate further capital spending reductions.

Sure. Let me share like given the current wildfire liability framework, and as we talked about, the resulting pressure on financing costs, we believe it's actually prudent to slow the pace of certain investments. While we continue to fund the work that matters most, and that's focused on our safety and our compliance and serving our customers. And as you've noted in some of your reports, the utility model was designed to enable both the robust infrastructure investment that the state needs and, and the and is important, strong credit ratings, and that's what reduces the cost rate payers. That model is not working in California right now. Now as for future plans, when we think about what we're considering, as we've said, all options are on the table and are being explored as part of the strategic view, and that includes capital allocation and our capital program going forward.

Given that capital spending reduction, what would be the impact to the company's operations?

Well, as we've always said, we're not going to sacrifice safety as we look at which work to delay or defer that safety is going to continue to be priority number one. Now that -- but there are impacts to our 2027 plan, and those changes impact areas like new housing, interconnecting new renewable generation, serving large load. And in our operations, though, what's very important, again, is that we keep our focus on the strong execution and pursuing efficiency opportunities under the simple, affordable model. As you all have come to expect from us. I mean, you've seen our record over the last few years in terms of how we've executed and how we've been lowering our O&M. But I'll say, honestly, it's painful for our co-work first. And of course, it's going to be painful for our customers as well. not to be able to deliver on some of this originally planned important work. We do our planning years out. And so to have made this decision is difficult for some of our coworkers who who enjoy delivering for customers. And our customers are at our heart. But honestly, this is just another example of wildfire reform is absolutely so critical.

Carolyn, thanks so much. We are receiving a lot of investor questions with regard to affordability. And also, we're definitely going to touch on PG&E's credit rating. But given that PG&E needs to issue a credit rating is currently in the speculative grade, the company maintains high capital spending and interest rates are more recently increasing, how does the company manage affordability concerns?

Okay. So we love this question because affordability is top of mind for us. And as I said, our customers are at the heart of everything we do. And so affordability continues to remain a key consideration in all of our long-term planning. And in fact, internally, we have an initiative that we call Path to Flat. And we are rallying all of our coworkers for them to focus on offsetting rate pressures through operating efficiencies, financing optimization, low growth and any other actions designed to moderate bill impacts and keep customer rates as flat as possible over time. Remember, in our simple affordable model, we target rates from 0 to 3%. And so this is really focused on trying to get to that 0%. Compared with many of our peers, we've already taken meaningful steps to reduce rates. I think I've mentioned this before, but I love mentioning it. We've reduced rates 5x in the last 2.5 years. But we're going to continue to make those investments needed to improve safety and reliability. Now that said, wildfire reform remains the major and critical headwind for affordable rates. And to quantify how that impacts rates over time, we actually looked backwards. We actually looked at our long-term debt issuance and measured our higher spreads due to wildfire risk compared to utilities with strong credit ratings. Okay? So we took this calculation. And since 2017, higher spreads on PG&A debt issuances, and this is primarily due to wildfire risk, have locked in approximately $4 billion of additional interest expense that will be borne by our customers over the life of their bonds. So it's -- to us, it's really clear that we need action from California to support our credit quality and to ensure our ability to affordably finance investment in the state.

Okay. Piggybacking on that. With the stated goal of reaching investment grade, why is attaining investment grade so important to PG&E? And what steps are required to reach this call, is it feasible to achieve investment-grade status with all further wildfire reform?

Okay. As I said, customers are at our heart. So becoming investment grade is important to us because it's important to our customers and affordability. Strong ratings help customer affordability through the lower financing costs for our infrastructure investments. It is the prime example of efficient financing, which is a key component of a simple core model that we've talked about. That is our value proposition. But look, and we've been working really hard to get to [ IG ] over the last 5 years, and we are very proud and I'm very proud of the progress all of our coworkers have made, both operationally and when you look at our wildfire risk and the management team that's been put in place and on improving our balance sheet and our credit metrics. I think you all would agree that we've done all the things within our control to achieve investment grade. But since the fires in Southern California, the focus is on wildfire reform and action to ensure a durable construct. We're continuing to advocate for those changes, as I've said. But honestly, we just -- we can't keep waiting for them, and that's why our strategic review has been announced. We find that the strategic review is actually opening the aperture for other pathways to achieve investment grade and a sustainable cost structure for our customers.

We're actually receiving a lot of investor questions with regard to capital market access. So as you see on the next slide, utilities such as PG&E typically operate with significant cash flow deficit that's on the next slide, please. Due to substantial capital spending requirements, making consistent and full access to the capital market is critical for maintaining credit quality. Given PG&E's recent decline of approximately 30% in equity valuations following the conclusion of the California's legislative session and the absence of any additional wildfire reforms do you believe the company continues to have full access to both debt and equity.

Yes. Thank you for that question. It's a really important one. It's really important for our regulators and our legislature as well to hear this answer. We may have access to both the debt and the equity capital markets, but it's not in the same stable, low-cost manner as our utility peers. Beyond the sub-investment-grade ratings, today, our stock is trading at more than a 50% discount to the utility sector. And that valuation gap means we cannot access capital at the same cost as our peers. So the reality today is that equity investors are not just asking us to avoid issuing new capital, they are actually asking us to return their capital. We hear that. [Audio Gap] Extremely concerning to policymakers who want stable, low-cost utilities to provide infrastructure in California. And as I keep saying, we are working hard to advocate for those changes.

Thank you, Carolyn. Just turning to Slide 18, kind of turning the regulatory filings. In November of 2025, PG&E initiated the fire -- first catastrophic wildfire proceeding, involving the presumption of prudence or AB 1054 Assembly Bill 1054. The California Public Utilities Commission review of this application includes costs paid by the wildfire fund totaling over $675 million as well as an additional $1.9 billion in costs. PG&E seeks to recover that were not covered by the fund. Could you explain to our audience the significance of the commission's order for PG&E's credit quality and discuss its broader credit implications?