PCG 2Q2016 Earnings Note

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Market Price (7/28/2016): $63.75/share; ST-Target: $75/share; NIV: $111/share

PCG: Fog is lifting but lingering mist causing confusion

Even though much of the San Bruno fallout is behind PCG, remnants of regulatory decisions continue to impact PCG in ways that only serve to unnecessarily continue to cast a pall on the stock. 2Q16 results were impacted by regulatory bureaucracy and Butte fire, but we’d expect poor performance should be made up in 3Q and 4Q, given management’s unchanged guidance. As expected, hydrology returned to relatively normal for PG&E due to El Nino, but flooding was issue for 1Q206 results too. PCG may issue close to high end of $600MM-$800MM in new equity. Capex plan for 2016-2019 has not changed materially and PCG is on track to achieve 5.5%-6.5% (was 5%-7%) CAGR through 2019, but rate base is expected to be some $0.2B lower at $32.4B due to lower gas transmission rate base from 2015 GT&S rate case. We’re intrigued with PCG’s pursuit of independent transmission projects with TransCanyon. We continue to expect PCG will grow dividend through 2019. We expect dividend payout ratio to increase closer towards 60%-65% by 2019. Beyond the current pale, PG&E’s near-term investment program should drive shareholder value, and management believes it has options for LT growth too.

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