Infrastructure Upgrades And Data Center Expansion Will Shape Future Prospects

Key Takeaways

• PG&E's strategic focus on infrastructure investments and wildfire risk mitigation aims to drive long-term growth and safeguard net margins.
  
• Operational efficiencies through cost reductions and significant load growth potential from data centers could boost revenue and enhance cash flow.
  
• PG&E faces uncertainty from wildfire risks, regulatory changes, and reliance on capital investments, all potentially impacting 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's management has updated their 2025 guidance range, projecting a 10% increase from 2024, and maintaining EPS growth of at least 9% annually through 2026-2028, indicating a focus on sustained earnings growth.
  
• The company has a robust $63 billion capital investment plan through 2028, aimed at improving infrastructure and safety, which is expected to drive long-term earnings and revenue growth.
  
• PG&E is working on mitigating wildfire risks through the AB 1054 framework, with potential policy enhancements that could lower future liability costs and protect net margins.
  
• Strategic initiatives such as nonfuel O&M cost reductions are creating significant savings, aiming for flat residential gas and electric bills, which could improve net margins and cash flow.
  
• There is significant potential load growth from new data center applications (5.5 gigawatts in the pipeline), which could positively impact revenue as beneficial load growth efforts materialize by 2030.

PG&E Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PG&E's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $1.72) by about March 2028, up from $2.5 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 15.8x on those 2028 earnings, up from 14.2x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 2.64% 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 risk of catastrophic wildfires remains a significant concern, and while progress is being made on mitigation, PG&E's ongoing liability exposure and the adequacy of the existing $21 billion wildfire fund could pressure future financial stability. This could negatively impact net margins if additional costs arise from new legislative requirements or if liabilities exceed current safeguards.
  
• Uncertainties around the AB 1054 framework and potential changes to wildfire liability regulations could introduce financial unpredictability, potentially increasing the cost of capital and affecting revenues and earnings.
  
• The company's capital investment plan, while substantial, may rely heavily on the successful implementation of policies and agreements with large-load customers, such as data centers. Any delays or failures in these agreements could affect projected revenues and earnings growth.
  
• The focus on cost reductions in nonfuel operations and maintenance (O&M) may face challenges from unforeseen increases in operational expenses due to stricter regulatory requirements or unexpected risk exposures, potentially impacting net margins.
  
• Performance goals related to dividend growth depend on sustained earnings increases, which could be threatened by economic downturns, increased competition, or higher-than-expected expenses related to climate resiliency, potentially affecting future earnings and shareholder returns.

Valuation

• The analysts have a consensus price target of $20.694 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 $26.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $27.2 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $15.97, the analyst price target of $20.69 is 22.8% 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.