To read the full note, please log-in and click on the following link:
Market Price (2/16/2017): $63.39/share; ST-Target: $75/share; NIV: $110/share
Prospects brightening and focus back on operations
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 due to higher than forecasted capex spending starting in 2017. However, PCG is talking up MT-LT AEPS CAGR, which we agree with. As expected, hydrology returned to relatively normal for PG&E and PG&E is taking measures to ensure another Orville Dam incident doesn’t occur. PCG expects to issue some $400MM-$600MM in new equity in 2017; PCG doesn’t expect to issue equity starting in 2018. Capex plan for 2017-2019 has not changed materially and PCG is on track to achieve some 7% CAGR through 2020 with 6.5%-7.0% CAGR in rate base. 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. However, we’re concerned for CA generation mix in the long-term due to its RPS. New Washington policies may be more of a boon than currently envisioned, especially on the tax front.