Infrastructure Investments And AB 1054 Resolution Will Improve Efficiency

Key Takeaways

• Strategic capital investments in infrastructure are key to enhancing earnings, service reliability, and customer loyalty, driving long-term revenue growth.
  
• Legislative and operational improvements aim to mitigate wildfire liabilities and optimize cost structure, positively impacting net margins and financial stability.
  
• Uncertain legislative outcomes, wildfire risks, and financial challenges could undermine PG&E's financial stability and earnings growth.

Catalysts

Through its subsidiary, Pacific Gas and Electric Company, engages in the sale and delivery of electricity and natural gas to customers in northern and central California, the United States.

• PG&E plans to leverage $63 billion in capital investments through 2028, which is expected to drive substantial rate base growth and enhance earnings by focusing on infrastructure improvements. This can positively impact revenue through a more reliable and efficient service offering.
  
• The company is banking on the expected legislative resolution of AB 1054, which is crucial for financial risk mitigation linked to wildfire liabilities, thereby potentially improving both cost structure and net margins.
  
• PG&E anticipates significant customer capital investment and operational efficiencies that have already resulted in reduced customer bills in 2025, with further reductions expected in 2026, likely enhancing company revenue through increased customer base and loyalty.
  
• Growth opportunities from increased data center load in California are projected to allow PG&E to deploy more capital and achieve higher margins on these investments, further driving revenue and improving customer affordability.
  
• The company aims to achieve investment-grade credit ratings, which could result in reduced debt costs, thus improving net margins and allowing for more favorable financing terms to support continued growth and earnings stability.

PG&E Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PG&E's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $1.77) by about May 2028, up from $2.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 2.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

PG&E Future Earnings Per Share Growth

Risks

• The unpredictability of AB 1054 legislative outcomes and potential adverse changes could hinder financial risk mitigation, affecting PG&E's ability to maintain affordable energy delivery, impacting future earnings.
  
• Wildfire risks, despite mitigation efforts, still present a significant threat to PG&E’s financial stability, potentially leading to unexpected costs and adjustments in net margins.
  
• Challenges in achieving investment-grade ratings at the parent company, linked to financial uncertainties and legislative discussions, could influence financing costs and thus impact net earnings.
  
• Equity dilution effects from previous stock issuances and lower returns on equity represent risks that could suppress earnings growth, impacting overall financial performance.
  
• The capital-intensive nature of PG&E's growth plan, including significant investments in data centers and undergrounding, may strain resources if not matched by cost-saving efficiencies and anticipated load growth, affecting revenue and net margins.

Valuation

• The analysts have a consensus price target of $20.829 for PG&E based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $27.4 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $17.04, the analyst price target of $20.83 is 18.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.