PG&E Affirms Dividend Likely Coming Next Year

We are reaffirming our $11.50 fair value estimate for PG&E PCG after the company reported earning $1.00 per share in 2021 on an adjusted basis. Earnings were in line with our full-year forecast. We are maintaining our no-moat and stable moat trend ratings. We continue to believe PG&E has some of the best growth prospects among U.S. utilities. We expect 10% annual earnings growth, slightly higher than management's updated implied target. Management raised its 2022-26 capital investment budget midpoint to $46.5 billion from $44 billion in November. We expect that investment budget to increase. The largest source of incremental growth likely will be management's plan to underground 10,000 miles of transmission lines primarily in high fire-risk areas. The total project could cost more than $20 billion but will require regulatory approval to make it into PG&E's budget. We expect PG&E to include the initial years of the program in regulatory filings this month. Inflation is the key macroeconomic risk facing PG&E given its large investment plan. Even if regulators approve PG&E's investments, inflation could cause PG&E to exceed the capital budget that regulators approve and lead to lower earned returns on capital. We continue to expect PG&E to reinstate a dividend next year. Management reaffirmed its plan to meet the postbankruptcy $6.2 billion cumulative retained earnings requirement and finish repositioning the balance sheet by mid-2023 such that PG&E's board could reinitiate a dividend. PG&E management initiated 2022 EPS guidance at $1.07 to $1.13, which is below our estimate. We plan to adjust our 2022 estimate based on additional disclosures from management and an updated plan for debt and equity financing. We are reaffirming our estimates for 2023 and beyond, resulting in no change to our fair value estimate. PG&E took no additional wildfire charges beyond the $1.15 billion liability for the 2021 Dixie Fire that it took in the third quarter.

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