PCG Initiation Report

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Market Price (1/29/2016): $54.91/share; ST-Target: $68/share; NIV: $97/share

PCG: Emerging out of shadow of San Bruno but work left to be done

We’re seeing PCG emerge from under the San Bruno tragedy, given the CPUC fine of $1.6B and the scope and scale of the federal investigations. At present, maximum remaining financial penalty appears to be some $1.13B. We calculate financial impact from San Bruno tragedy to be some $6.3B-$7.5B, a great opportunity missed. We believe that in the ST-MT, PG&E has enough investment opportunities to compare well with its peer group; however, in the LT, perhaps due to much capital leak into non-rate-based projects, we feel that PG&E’s opportunities may be more limited. Also, we look for dividend growth to emerge as early as late 2016, a time frame by which we believe more certainty will result surrounding the final penalty payments that need to be made. Additionally, we are puzzled by violations of communications protocol with CPUC commissioners, something that should never have happened, but PG&E has taken concrete steps to remedy and, therefore, would not suspect repetitions.

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