PCG Earnings Note (05/03/2018): Potential wildfire costs continue to pressure PCG but upside’s alluring

Wildfires causes PCG to suspended its dividend and 2018 AEPS guidance, and inverse condemnation judgements in the past cause management to prudently send adverse message to investors.
Through early 2019, we’d advise against trying to catch a falling knife, but once clarity for wildfire liabilities are known, we feel that PCG presents a strong buying opportunity, given high investment needs due to California’s green policies, strong management team, and good regulatory structure
For modeling purposes, we assume dividend suspended for 3-years then we assume $5B of equity capital spending over 5-years. This still results in NIV of some $112/share, which leads us to believe that investors will have good future buying opportunity.
PCG expects to issue some $500MM/year in new equity in 2018 & 2019. Capex plan for 2018 is unchanged at $6.3B.
For investors, higher rate base due to $800MM elimination of bonus depreciation, which accelerates rate base growth to 7.5%-8% through 2019 vs. 6.5%-7% previously
We raise our ST-Target to $40/share from $31/share but our NIV remains at $125/share ($112/share including $5B in wildfire liabilities over a 5-year period starting in 2019)

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PCG (02/09/2018): At some point PCG presents great buying opportunity, in our view

Wildfires causes PCG to suspended its dividend and 2018 AEPS guidance, and inverse condemnation judgements in the past cause management to prudently send adverse message to investors
For at least 12-months, we’d advise against trying to catch a falling knife, but once clarity for wildfire liabilities are known, we feel that PCG presents a strong buying opportunity
For modeling purposes, we assume dividend suspended for 3-years then we assume $5B of equity capital spending over 5-years
This still results in NIV of some $90/share
PCG expects to issue some $500MM/year in new equity in 2018 & 2019
Tax Cut and Jobs Act (TCJA) has $0.5B positive impact for customers. For investors, higher rate base due to $800MM elimination of bonus depreciation, which accelerates rate base growth to 7.5%-8% through 2019 vs. 6.5%-7% previously.
We drop our ST-Target to $31/share and our NIV to $90/share

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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FLASH PCG: PG&E Suspends common and preferred dividends due to wildfires

This afternoon, the board of directors of PG&E Corporation and Pacific Gas and Electric announced the suspension of dividends for both the common and preferred stock as of the three month ending January 31, 2018. The decision was made due to the unprecedented wildfires from October 2017 in northern California, given that California’s courts have consistently applied inverse condemnation to events in which utility equipment were involved in the incident, regardless of whether or not the utility acted in accordance with established inspection and safety rules. This means that the utility is liable for the property damages and attorney’s fees associated with the incident. It is our understanding that California courts apply inverse condemnation under the assumption — not necessarily accurate, in our opinion — that the utility would be permitted to pass-through these costs to their customers.

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PCG: ALJ PD on Diablo Canyon seems a bit capricious, so room for upside

The PD has adjustments to employee, community, and energy replacement programs that PG&E believes are inappropriate and advocates for the settlement agreement to go forward as is. The significant differences between the settlement agreement and the PD are as follows:

The PD proposes that replacement power for Diablo Canyon Power Plant (DCPP) should be handled through the Integrated Resource Plan (IRP) instead of separately through an independent track:
Our Analysis:
Instead of $350MM for the employee retention program, the PD proposes only $175MM, cutting the total provisions for employee assistance to $345MM from $520MM:
Our Analysis:
Complete denial of the $85MM in community assistance program (CAP):
Our Analysis:

Our Conclusion: Hearings are scheduled for November 28 with rebuttals due by December 4. We continue to expect a final decision (FD) by yearend. We’d expect the FD to … .

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PCG 3Q2017: After great quarter is PCG bad luck or have bad karma or bad mgmt.?

Given 9-months’ of strong results, PCG should’ve bumped-up guidance and celebrated. Then BAMO! Wildfires! We wonder why PCG goes through these periodic tragedies. So, is it bad luck or bad karma? We don’t know, but certainly the market has spoken.
Now it seems PCG’s going to be mired in wildfire controversy for months, if not years, which likely means PCG is going nowhere despite strong results, good strategy and good execution, in our opinion
Other than wildfires, PCG marked another uneventful quarter. And, PCG continues to talk-up MT-LT AEPS CAGR, which we agree with
Given wildfires, we’re no longer certain that it has no need for new equity starting 2018
We continue to be intrigued with PCG’s pursuit of independent transmission projects with TransCanyon but there’s no project to be had

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PCG 2Q2017 Earnings Note: PCG’s Brilliantly boring quarter and strong operational execution bodes well

Brilliantly boring quarter and strong operational execution bodes well || Although 2Q2017 was marked by stronger than expected June weather, the Utility performed well meeting over 50% of its power needs through renewables. Other than minor updates, small shifts in capex, update on its cost of capital and 2017 GRC – both of which did not surprise – PG&E marked an uneventful quarter. Despite strong start to 2017, keeping guidance same. Like all businesses, it seems like PCG is not including upside from regulatory, economic, and tax policy changes, which we feel may lead to higher earnings. However, PCG is talking up MT-LT AEPS CAGR, which we agree with. PCG expects to issue some $400MM-$500MM in new equity in 2017, $100MM lower on the top range and no need for new equity starting 2018. Capex plan for 2017-2019 is not materially changed. We continue to be intrigued with PCG’s pursuit of independent transmission projects with TransCanyon but no update was provided. We continue to expect PCG will grow dividend through 2019 and expect dividend payout ratio to increase closer towards 60%-65% by 2019. PG&E’s NT investment program should drive shareholder value. Diablo Canyon issues close to resolution but stranded costs isn’t expected to be material, if any. We feel starting in 2018 PG&E is set to join its CA peers as a strong, growth-oriented utility investment with strong prospects through the LT-horizon.

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PCG 2017 GRC Final Decision

On May 11, 2017, the California PUC (CPUC) promulgated its final decision (FD) regarding Pacific, Gas & Electric Company’s (PG&E) 2017 general rate case (2017 GRC)
The FD substantially replicates the alternate proposed decision (APD) that was issued on April 4, 2017, except with two modifications related to the recovery of certain customer outreach and other incurred costs resulting from residential rate reform implementation and potential changes to the federal corporate tax rates
The FD calls for an effective date for revenue increases as of January 1, 2017 (retroactively to that date) in the amount of some $88.2MM, an increase of about 1.1% to roughly $8.0B
Compared to PG&E’s final requested increase of some $319MM, the permitted increase for 2017 in the FD is lower by about $231MM or lower by some 62%
The increase was based on adjustments to 2016 rates in effect:
Gas distribution rates decreased by about $3MM
Electric distribution rates decreased by some $62MM
Electric transmission rates increased by approximately $153MM
The 2Q2017 financial results are expected to account for the increase attributable to the cumulative 6-months financial results ending June 30, 2017

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PCG 1Q2017 Earnings Note

San Bruno finish-line is tantalizingly close; focus shifted to ops, finally ||

March 15, 2017, all parties to San Bruno litigation reached settlement, which judge approved 6 days later. July 18, 2017, final ruling/approval due on this settlement. Also, on March 28, 2017, Ex Parte communications settlement agreement was filed. Focus back on operations, PCG launches $300MM cost savings program. Continues to fly 6.5%-7% 3-year CAGR for rate base flag, which is strong. PCG also contributing to CA’s objectives to reduce GHG by launching $130MM light-duty vehicle charging station program. Despite strong start to 2017, keeping guidance same given 2015 GT&S rate impact cumulating towards 1H2017. Like all businesses, it seems like PCG is not including upside from regulatory, economic, and tax policy changes, which we feel may lead to higher earnings. However, PCG is talking up MT-LT AEPS CAGR, which we agree with. As expected, hydrology returned to relatively normal. PCG expects to issue some $400MM-$600MM in new equity in 2017; no new equity starting in 2018. Capex plan for 2017-2019 has not changed materially. We’re intrigued with PCG’s pursuit of independent transmission projects with TransCanyon. We continue to expect PCG will grow dividend through 2019 and expect dividend payout ratio to increase closer towards 60%-65% by 2019. PG&E’s near-term investment program should drive shareholder value.

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