Earnings Call Transcript - PCG Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome you to the PG&E Corporation Third Quarter 2025 Earnings Conference Call. Please note, we have allotted 45 minutes for this conference call. I would now like to turn the call over to Jonathan Arnold, Vice President of Investor Relations. Jonathan, you may begin.

Jonathan Arnold, Vice President of Investor Relations

Good morning, everyone, and thank you for joining us for PG&E's Third Quarter 2025 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides along with other relevant information can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended September 30, 2025. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe.

Patricia Poppe, CEO

Thank you, Jonathan. Good morning, everyone. Our core earnings per share are $0.50 for the third quarter and $1.14 for the first nine months of 2025. Today, we're narrowing our full year guidance range. We've previously shared a range of $1.48 to $1.52. The new range is $1.49 to $1.51 and we're keeping our bias toward the midpoint which is up 10% over 2024. We're also introducing our 2026 EPS guidance range of $1.62 to $1.66. At the midpoint, this is up 9% from our 2025 midpoint. Last month, on our investor update call, we extended our 5-year capital plan through 2030. Highlights included at least 9% EPS growth each year 2026 to 2030, a 5-year capital plan of $73 billion through 2030, which supports average annual rate base growth of 9% and a financing plan which does not require new equity also through 2030. With the 2025 California legislative session over and the enhanced protections of Senate Bill 254 in place, our team is focused on collaborating with key parties, advisers, and state agencies as the Wildfire Fund administrator prepares their April 1 report and recommendations for how best to socialize and mitigate climate-driven wildfire risk in the state. This report is expected to lay out a wide range of policy options that will inform potential legislative action to stabilize the utility sector in the 2026 session. We're feeling the positive momentum of this process with what Governor Newsom, on issuing his recent executive order, calls a whole of government response to protect Californians from Wildfire. We share the governor's sense of scale and urgency and are committed to supporting the state's efforts to meaningfully adapt California's policy construct to meet the moment. As this work continues, we know that there's no better protection for our customers and our investors than predicting and preventing catastrophic fires in the first place. PG&E's physical layers of protection are delivering. Through October 20, our total year-to-date CPUC reportable ignitions are down over 35% from 2024 levels and are running lower than any year since we started tracking these data in 2015. Despite this year having seen the second largest number of fires greater than 10 acres statewide since 2017, PG&E is on track for a third consecutive year of zero structures destroyed due to CPUC reportable fires in high-risk areas under high-risk conditions. We are proud of that. In spite of continued elevated climate-related risk, PG&E's layers of protection from ignition prevention to hazard awareness and response are proving effective. Contributing to this performance, we can point to several ongoing and new mitigations. About a month ago, we marked a significant milestone for our customers. PG&E has now constructed and energized 1,000 miles of power lines underground in the highest fire-risk areas. As we've consistently said, undergrounding remains the most affordable and effective way of delivering the safety and resilience our customers deserve. Customers should not have to choose between safety and having reliable electricity. Undergrounding is the only mitigation that delivers both. This year, we cleared vegetation in a 50-foot radius at the base of nearly 4,000 transmission structures after our data showed this approach would have contained the majority of transmission-related ignitions that we have experienced over the last three years. And we're continuing to deploy advanced sensor capabilities, including installing another 8,500 sensor devices this year, which builds on the 10,000 we rolled out last year. These low-cost sensors, coupled with our existing smart meters and our newly deployed AI-enabled machine learning model are enabling secondary system-wide continuous monitoring. This capability allows us to detect potential faults on the system before they occur, including on the customer side of the distribution pool. We will continue to leverage data to drive our mitigations in the field, making the system and our customers safer each and every day. In addition to executing on this important safety work, my coworkers have been leveraging our performance playbook to deliver consistent outcomes across the business for customers and investors. You can see our simple affordable model is working. Our 5-year plan contemplates $73 billion of customer beneficial capital investment through 2030. At the same time, building on lowered electric rates this year and planned even lower rates for bundled electric customers in 2026, we expect customer bills in 2027 to be flat to down to where they are this year. We are doing this by eliminating waste and delivering on our 2% O&M cost reduction goals, enabling rate reducing load growth by partnering with our large load customers and executing on a financial plan built with flexibility, conservatism, and credit metric targets supportive of investment-grade ratings, which will lead to interest expense savings for customers. We know that performance is power. When we perform, we will have the power to influence perceptions and outcomes. By putting customers at the heart of everything we do and by doing what we say, our brand trust is on the rise and has been since our 2027 GRC filing started to change the narrative on affordability. In fact, when compared to our U.S. utility peers, the second quarter 2025 residential customer engagement study by Escalent showed we had the highest annual increase in Brand Trust. Our data center pipeline remains robust at over 9.5 gigawatts. We've seen modest net attrition in our application and preliminary engineering phase since June. However, our projects in the final engineering stage continue to grow and advance. Most of the applications in our pipeline are for 100 megawatts or less. This is a function of existing California regulation but also a sign that data centers designed to support AI inference models have strong and compelling reasons to want to locate in PG&E's service area, which includes Silicon Valley, the home of the technology sector. Data centers of this size can be located in densely populated areas close to the end user and benefit from Northern California's extensive existing fiber network. This makes our service area a prime location for these customers who require real-time speed to ensure an optimal user experience. We are laser-focused on making this a win-win-win for our cities, our customers, and data center developers. For example, we partnered with the City of San Jose to identify more than 150 acres of land adjacent to our existing infrastructure and in the heart of Silicon Valley that will be power-ready for the data center selected from the city's competitive RFP issued earlier this year. Our robust pipeline with a diverse set of projects is a great opportunity for customer affordability and California's economic prosperity. Every gigawatt we bring online offers the opportunity to reduce electric bills by 1% to 2%. I'll remind you that this is upside to our plan, both in terms of customer affordability and in terms of capital growth. Given our bias for conservative planning, our capital plan only includes about $300 million a year for this type of capital, much of which falls under our FERC formula rate. With that, I'll hand it over to Carolyn to discuss our financials.

Carolyn Burke, CFO

Thank you, Patti, and good morning, everyone. Here on Slide 8, we're showing you our earnings walk for the first nine months of 2025. Core earnings per share are $1.14 and we're on track to deliver on our 2025 non-GAAP core EPS guidance narrowed today. As you can see, we've made additional progress towards our O&M cost savings goal, contributing $0.05 for the quarter and $0.08 year-to-date. We continue to see unit cost reductions in our inspection processes and savings through vendor contract renegotiations as two examples of our cost savings initiatives. Another key driver is timing and other. This bucket is contributing $0.10 for the quarter and $0.04 year-to-date. Both the third quarter and nine months include benefits from smart tax planning. As a result of a method change, we're able to accelerate the deductibility of certain marks and recognize greater tax savings. We view this tailwind as upside available to redeploy for the benefit of our customers in addition to protecting future years. Turning to Slide 9. There's no change to the extended 5-year capital plan, which we shared with you last month. Our planned customer beneficial investments support average annual rate base growth of approximately 9% from 2026 through 2030. Our rate base growth in turn supports annual core EPS growth of at least 9% also through 2030. As a reminder, our rate base forecast excludes the $2.9 billion of CapEx to be securitized under SB 254. Incrementally today, we're sharing more detail on our capital investment plan as shown here on Slide 10. This continues to be a no big bets plan. It includes many important projects over the course of the 5 years to improve safety, reliability, and resiliency for our customers while enabling economic growth through capacity upgrades and new business connections. To give you some examples, our plan includes a recently approved upgrade of our Helms hydro facility, enabling at least a 150-megawatt increase in generating capacity. It also includes a substation upgrade, which more than doubles the electric capacity and improves reliability north of Sacramento. And it includes the deployment of about 300,000 grid edge meters by 2030. These meters have distributed intelligence apps and advanced data processing, which support customer electrification as well as wildfire risk reduction. Last month, I shared with you our financing guidepost, shown here again on Slide 11. Importantly, our plan is built not to require new common equity through 2030, a key consideration given where we currently trade. I also emphasize that we are continuing to prioritize investment-grade ratings including maintaining FFO to debt in the mid-teens. Again, IG is one of the most meaningful potential affordability enablers for our customers. I'll remind you that we're targeting a dividend payout ratio of 20% by 2028 and maintaining that level through 2030. This offers financing flexibility over the course of our plan as well as implying near-term compound EPS growth well in excess of 50% over the next 3 years. Our planning also contemplates the possibility that the Wildfire Fund administrator calls for the contingent contributions authorized by SB 254. Regarding capital allocation, I'll remind you what both Patti and I shared on our September update call. Based on progress in the 2025 legislative session and encouraging signals that the state is serious about pursuing further reform in Phase 2, we see the investment plan we have shared with you as best delivering for our customers and investors now and for the long run. That being said, we'll continue to take a disciplined approach when it comes to capital allocation. If we were to reach a point where we aren't seeing clear indications of progress, we would certainly consider reallocating some capital towards more immediate shareholder returns, of course, always being mindful of our credit metrics. A key differentiator of the PG&E story is our performance playbook and focus on waste elimination to deliver better outcomes for our customers. To that end, we've achieved nonfuel O&M savings in excess of our target for 3 years running, and I'm confident that we will meet or exceed our 2% reduction target again this year. We're also on track to make meaningful improvements in our capital to expense ratio this year and beyond. In 2024, we invested $0.90 of capital for every dollar of expense. We forecast that this year, we'll invest $1.20 of capital for every dollar of expense. On the regulatory and policy front, we expect a proposed decision on our cost of capital application in November. And as Patti said, important milestones are coming up as stakeholders weigh in on the second phase of SB 254. I'll end here on Slide 14, with a reminder of our value proposition enabled by our differentiated performance. We're executing on our simple affordable model by generating annual cost savings for the benefit of our customers, enabling load growth with our 5-year capital investment plan, and improving our balance sheet. I'm pleased Fitch has taken the first move to return our parent company rating to investment grade. This is just the beginning as we continue to prove out our philosophy that performance is power. And now I'll hand it back to Patti.

Patricia Poppe, CEO

Thank you, Carolyn. The fundamentals of the PG&E playbook are undeniable. Strong layers of physical risk mitigation improving every day. Ample runway to continue reducing nonfuel O&M, rate reducing load growth serving customers and California's prosperity, improving credit ratings and balance sheet health and our differentiated rate case proposal as a critical proof point all of which provide a path for customer bills to be flat to down in 2027 from today. These performance fundamentals set the stage for constructive legislation but more importantly, a framework that creates prosperity for customers and investors. With that, operator, please open the lines for questions.

Operator, Operator

Your first question comes from the line of Steve Fleishman with Wolfe Research.

Steven Fleishman, Analyst

So just on the SB 254 process, is there any better sense of in these steps, whether those would be made available that we can see? Or are we going to really more see things towards the end of the process?

Patricia Poppe, CEO

Yes. Thanks, Steve. In terms of the process, we are uncertain about what the CEA will make public. However, we know that stakeholder abstracts are due on November 3, with full submissions due by December 12. State agencies are expected to submit final recommendations by January 30, and the final study from the CEA will be available on April 1. We are unsure what information will be publicly available, and we are also waiting for that information ourselves, but we do have those milestone dates.

Steven Fleishman, Analyst

Okay. Understood. Are we just waiting for a proposed order now that the process is complete regarding the cost of capital case?

Carolyn Burke, CFO

Yes, Steve, this is Carolyn. We are indeed moving forward as we've previously mentioned, and we anticipate the PD will be ready in November 2025.

Operator, Operator

Your next question comes from the line of David Arcaro with Morgan Stanley.

David Arcaro, Analyst

I guess would you expect the policy reform recommendations next April to be prescreened with like the legislature and kind of have buy-in in advance of then going into the session? Is this something that we should have gave you a little bit more confidence that it's kind of vetted and should have a good chance of making it through?

Patricia Poppe, CEO

As we discuss this, David, let's take a moment to reflect on our current position before we look ahead. Firstly, this year's legislature took decisive action. There were certainly concerns regarding the durability of the fund and the associated risks for shareholders if the fund were to become depleted and the disallowance cap lifted. I want to emphasize that the legislature and our governor acted promptly, and we appreciate those efforts. There are significant benefits that I would like to highlight. While there's considerable attention on Phase 2, I want to remind everyone about Phase 1. Protecting the fund through the continuation account and maintaining the disallowance cap was a crucial aspect of the continuation of AB 1054. Additionally, there were several improvements to AB 1054 that I want to briefly mention. Moving the disallowance cap date to the date of ignition is a noteworthy change from SB 254 that hasn’t received much attention. This adjustment protects investors from billions of dollars in potential exposure through the disallowance cap and any repayments the IOUs would need to make to the fund. This significantly lowers that exposure, which is an important enhancement. Furthermore, there are no upfront contributions with a substantial portion of the IOUs' contributions to the fund being contingent on future large utility cost fires that could threaten the fund's liquidity. This is a much better way to replenish the fund compared to the previous method. Also, all new contributions from IOUs to the fund will serve as credits against future regulatory disallowances, which is another significant improvement. Individual utility funding has been adjusted, which has decreased the amount that PG&E pays into the fund by about 25%. I mention all of this to remind everyone of the considerable advancements made as a result of Phase 1 of SB 254. We are also very grateful for the governor's strong support for Phase 2. He didn't have to issue an executive order; such study bills are common. He aimed to emphasize the importance of the actions taken by the CEA, the report, recommendations, and the prospective legislative actions in 2026 as a priority for him through that executive order. His comments about a coordinated government strategy regarding wildfires are crucial for California and its residents. The comprehensive language in both the legislation and his executive order was encouraging to see. However, I believe it's too early to determine what the optimal solution will be. We will see various proposals emerge. The timeline I discussed with Steve outlines how the process will unfold. The governor and legislative leaders will engage in discussions as this progresses. I anticipate that the CEA report will offer valuable recommendations for the legislature to consider.

David Arcaro, Analyst

Excellent. No I appreciate all that color in the context there for the entire process. And then maybe a bit of a separate question here. From what you can tell, is the undergrounding decision still on track for this year? And how should we think about that? Could that still lead to a future acceleration of your undergrounding activities in the future GRCs?

Patricia Poppe, CEO

Yes. Currently, on October 30, in just a couple of days, the commission meeting will take place. The final recommendations on the 10-year undergrounding procedure are on the agenda. We have expressed concern regarding some of the requirements and the methodology used to determine which miles should be undergrounded. So, we will closely monitor the commission's direction next week. As I mentioned in our prepared remarks, we believe that undergrounding is the appropriate mitigation for some of our miles, but not all. This is important to understand. The miles we are discussing are in our highest risk areas, where customers are experiencing 10 or more outages due to our safety measures. Our safety methods, which include enhanced power line safety settings, do reduce risks and keep customers safe, but the associated outages are unacceptable. Therefore, in these areas, we need to enhance risk reduction through undergrounding and provide a better customer experience with a resilient energy system that can withstand all types of weather conditions, such as fire hazards and extreme snow. We remain optimistic about undergrounding as the most cost-effective way to reduce risk and enhance resiliency in these high-risk miles, and we will continue to advocate for it. We will work with the commission, depending on their timing regarding our 10-year filing, and we will need to comply with the requirements set by them. Additionally, as part of our 2027 GRC, we proposed a bridging strategy in case there are any delays to the 10-year plan. This strategy aims to maintain our current undergrounding level of approximately 300 miles per year. I am pleased to report that we have reached a significant milestone of 1,000 miles underground, at a cost that is 25% lower than when we began. We are continuing to improve costs for customers while enhancing their safety and resilience.

Operator, Operator

Your next question comes from the line of Julien Dumoulin-Smith with Jefferies.

Julien Dumoulin-Smith, Analyst

Just wanted to follow-up, actually, if I can push a little bit more on the Phase 2 piece. How do you think about that conversation fitting into a broader, more comprehensive focus in the state on reform of insurance? Just want to understand what your understanding of the scope of the conversation is in the coming year as well as if there is any nuance to break apart as far as inverse condemnation. I get that IC perhaps is maybe a bridge too far or at least it seems like a big ask. Are there other ways to dissect this that are relevant that folks should be thinking about? Again, I don't want to preempt the study per se that's coming out, but how do you think about strict liability conversation more broadly here as best you can tell? I get it's early.

Patricia Poppe, CEO

Yes, Julien, if I had a crystal ball, I would say that it's too soon to say. The governor's comments in his executive order and in the actual legislation itself were clear that it's a whole of government approach to insurance and utilities. Look, utilities are so important to California's future. We at PG&E power the tech industry. We power the future prosperity of our state. We think there's a big case to be made that our financial health and our customers' well-being are essential ingredients to California's future. So we'll look forward to how the study plays out, and we'll look forward to fruitful discussions with many parties to determine the best way to protect customers, preventing catastrophic wildfire in the first place and then having the right response and a means of compensation for those people who are harmed. So I do look forward to the whole of government approach that the governor has outlined.

Julien Dumoulin-Smith, Analyst

Awesome. Excellent. And then just following up a little bit on the nuance of the data center pipeline. It was down slightly here, but again, if you can speak a little bit to what transpired there with the 500-megawatt reduction. But more broadly, as you think about it actually coming into fruition, would you anticipate being able to raise capital as you drive more bill headroom from data center realization? Or is that more about having a more of a linear read to bill reductions at large?

Patricia Poppe, CEO

Yes, I would suggest this is great news. The most important numbers to focus on are those getting closer to construction. The final engineering numbers have increased, and we expect that out of the 1.6 gigawatts in final engineering, about 95% will be online by the end of 2030, with some projects coming online as early as next year. This indicates that our pipeline is robust. The opening of the funnel is very dynamic, and I had a conversation this week with another customer that isn't reflected in those numbers, so these figures fluctuate frequently. This is positive because we're committed to ensuring that any new large load added in California benefits both customers and investors. This means we can invest in the necessary capital for transmission and some distribution systems to support this new load. The new revenue generated from that large load will more than cover the costs for customers to fund that capital expenditure, allowing us to increase our returns while lowering bills for customers. This is a significant win for California. Additionally, when we consider the tax benefits and the local property and sales tax for communities, I'm frequently in discussions with community leaders and mayors who are very optimistic about this as a driver of growth and new revenue for our cities, enabling new housing and public safety options. There is considerable momentum statewide to ensure we can bring this new load online.

Carolyn Burke, CFO

Yes. In response to your second question, as we consider additional capital for these new data centers, we have three main options. One option is to expand the plan, but this seems less likely given our current stock valuation. Another possibility is to improve the plan, specifically by enhancing affordability for our customers by integrating beneficial load from data centers. This is a strong possibility. Lastly, we could extend the duration of our above-average growth trajectory. Therefore, we're leaning more towards the second or third options rather than the first.

Operator, Operator

Your next question comes from the line of Carly Davenport with Goldman Sachs.

Carly Davenport, Analyst

Maybe just to start on some of the commentary on the credit side. You obviously highlighted the Fitch upgrade in your prepared remarks. Just curious if anything you can share on conversations with the other agencies and sort of how you're thinking about milestones on the path to potential upgrades there as well?

Carolyn Burke, CFO

Yes. We continue to have good conversations with both Moody's and S&P. And as you know, Fitch just did the upgrade. I would say they're looking for what you're looking for, which is progress on Phase 2 and that would be a significant trigger for them as they think about our investment-grade. They both indicated that our financial credit metrics meet their investment-grade criteria to be really looking at the regulatory environment. Moody's is on a typical cycle where we see action in the first quarter. But again, that's really up to their internal assessment of the regulatory environment as well.

Carly Davenport, Analyst

Great. And then maybe just on the O&M front. You've executed really well there relative to your targets for a number of years now. I guess just help us frame out what it would take for you to have the confidence to potentially raise that target? Or just curious if that is a potential driver of upside as you think about the 2026 range that you've introduced here?

Carolyn Burke, CFO

Yes. I continue to be very proud of our PG&E coworkers and their implementation of the lean playbook to eliminate waste from the system. As you mentioned, we have achieved this for three consecutive years and are on track to meet or exceed the 2% target this year. I have complete confidence that this progress will persist. While we are seeing significant advancements in our capital expense ratio, we are still in the fourth quarter, leaving plenty of opportunities ahead. I would say this remains a key factor in our simple and affordable model. We are closely analyzing our figures to identify further opportunities. We are not considering raising the 2% target for this year, but it certainly contributes to our affordability and earnings.

Operator, Operator

Your next question comes from the line of Aidan Kelly with JPMorgan.

Aidan Kelly, Analyst

Just wondering how comfortable are you with 2026 EPS guidance before you have a resolution on the cost of capital proceeding, I guess just any detail on what outcome ranges are contemplated in this outlook would be great.

Patricia Poppe, CEO

Yes, I think you can rest assured that we plan conservatively. We think we filed a good cost of capital proceeding or filing. We think there's no lack of evidence that our actual cost of capital is up. All that to say, though, as we build out our plan, and I think you can start to really see the pattern year after year after year that despite a variety of circumstances, we ride that roller coaster so you don't have to, and we deliver what we say. I think we could all agree it's a choppy year, and there's been a lot of conversation here in California, and yet, we continue to deliver. And that's what I want everyone just to get comfortable with that we will plan conservatively under a variety of scenarios and make sure that we're in a position to deliver for customers and investors very consistently.

Aidan Kelly, Analyst

Got it. That's clear. On the storage front, it seems there is some positive momentum for commerciality with the completion of the CRC energy storage microgrid with Energy Vault last month. I'm curious to what extent you see this project as a model for other high-risk communities, especially considering the reliability concerns during safety shutoffs.

Patricia Poppe, CEO

Yes, we're very enthusiastic about that project and are also preparing to implement similar installations in other communities. Each time we undertake these projects, we gain valuable insights. This will provide us with another opportunity to learn. Ideally, we aim to reduce outages by creating purpose-built infrastructure, such as underground installations. In situations where public safety power shutoffs are essential for our safety measures, we will focus on minimizing the impact by using sectionalizing devices and microgrids to strengthen and protect downtown areas, ensuring they can maintain critical services during a public safety power shutoff. Our goal is to make these outages virtually unnoticeable to our customers while ensuring their safety. We will continue to explore and pursue the full range of operational opportunities available to us.

Operator, Operator

Your next question comes from the line of Gregg Orrill with UBS.

Gregg Orrill, Analyst

How do you think about the direction of the payout ratio beyond 2028, if that's possible to know at this stage?

Carolyn Burke, CFO

Well, as we had indicated in our last call that we are growing the dividend to a 20% payout to '28 and then maintaining it through 2030 at 20%.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the conference back over to Patti Poppe, Chief Executive Officer, for closing comments.

Patricia Poppe, CEO

Thanks, Christa. Well, thank you, everyone. We appreciate you joining us. As I hope you hear today, we're on full speed here at PG&E. Our entire team is working to deliver for our customers and for you, our investors every day. You can expect nothing less. With that, we look forward to seeing you at EEI.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.