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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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 2015 GT&S Preliminary Decision

PCG: 2015 GT&S Rate Case: Ouch! ||

On May 5, 2016, the proposed decision and the alternate proposed decision, which is substantively similar to the proposed decision, were issued in the 2015 Gas Transmission and Storage rate case by the California PUC.

Table 1. 2015 GT&S rate case proposed decision (PD) ($MM)

2015

% Ute Ask

2016

% Ute Ask

Increase

2017

% Ute Ask

Increase

Utility Ask

$1,263

$1,346

+6.57%

$1,488

+10.5%

PD

$1,109

87.8%

$1,183

87.9%

+6.67%

$1,309

88.0%

+10.7%

Ex Parte Penalty

($164)

$0

NA

PD B4 SB

$945

74.8%

$1,183

87.9%

25.2%

$1,309

88.0%

10.7%

SB Related Disallowed Expenses

($158)

$0

$0

SB Related Disallowed Revenue associated w/Capex

$10

($51)

($107)

SB Related Penalty Adj. related to Ex Parte Penalty

$62

$0

$0

NET PD

$859

68.0%

$1,132

84.1%

31.8%

$1,202

80.8%

+6.18%

Source: Company data and Auvila Research Consulting

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