PG&E Q3 Earnings Show Company on Track to Meet Full-Year Forecast

We are reaffirming our $12.50 fair value estimate for PG&E (PCG) after the company reported earnings per share of $0.29 in the third quarter and $0.84 through nine months on a normalized basis, on track to meet our full-year forecast. We are reaffirming our no-moat and stable moat trend ratings.

PG&E management reaffirmed its 2022 EPS guidance of $1.09-$1.11 and initiated 2023 EPS guidance of $1.19-$1.23, both in line with our forecast. Management also reaffirmed its 9% average annual growth outlook for 2024 and 2025, in line with our forecast. We consider this a positive sign of consistency and long-term clarity that has been missing from PG&E for more than a decade.

We think investors’ increasing confidence in PG&E’s plan has fueled the stock’s recent rally. The shares are up 58% since mid-June, climbing from a 20% discount to our fair value estimate to a 20% premium. PG&E also rejoined the S&P 500 index on Oct. 3, likely contributing to the rally.

We still think PG&E faces more risks than most other utilities. PG&E also won’t be eligible to reinstate a dividend until at least mid-2023 if financial performance remains on track. Even then, management will face a tough trade-off between paying a robust dividend and reinvesting capital to increase earnings. We think investors should temper their dividend expectations.

PG&E’s plan to sell its power generation assets next year is the key immediate hurdle. Proceeds would help eliminate equity needs at least through 2024 and pay down holding company debt, both of which will support EPS growth by reducing equity dilution and interest expense.

We continue to expect PG&E’s capital investment to climb from $8 billion in 2022 to more than $10 billion annually beyond 2025, assuming regulatory support. The outcome of PG&E’s cost of capital proceedings and 2023-26 general rate case could shift the amount and timing of that capital investment.