PG&E Corporation Virtual Webinar Series with CFOs – Featuring PG&E Corp

Hi, and welcome to today's S&P Global Ratings webinar. I'm Gabe Grosberg, managing director and sector lead for S&P's North America's regulated utilities practice. Today's webinar is part of a larger series featuring interviews with utility industry CFOs. The industry has never been more complicated, with considerable data center expansion, robust capital spending, high cash flow deficits, and wildfire risk. I, along with Gerrit Jepsen, S&P's primary analyst for PG&E and director at S&P's North America utilities practice, will be moderating today's discussion. We are thrilled today to be joined by Carolyn Burke, CFO of PG&E. We want to thank the large number of investors who joined us on today's call. This webinar is primarily designed for our sophisticated fixed income investors, and accordingly, we will first be asking your pre-submitted questions.

You could also submit questions at any time through the Q&A box located on the left-hand side of your screen. Carolyn, prior to beginning our discussion, I believe it is extremely important to level set with investors as to where exactly S&P stands with regard to PG&E's credit quality and wildfire risks. As you see on the next slide, California investor-owned utilities operate with considerable higher risk than most other utilities across the U.S., where long periods of drought driven by climate change increase the likelihood of catastrophic wildfires. Under California's interpretation of inverse condemnation, utilities can be held financially liable for wildfires caused by their equipment, regardless of negligent. We have publicly acknowledged that absent California taking steps to reduce these risks, PG&E and Edison would likely be rated in the single B category.

However, California did take steps to reduce these risks, including establishing a large wildfire fund and a liability cap. At the same time, as you see on the next slide, S&P Global Ratings assess that these developments as highly supportive of credit quality, directly contributing to our two-notch upgrade of PG&E over the past 30 months. However, despite California's efforts, significant risks remain. This includes the absence of an automatic replenishing mechanism for the wildfire fund. As such, as the fund depletes, the credit quality of the utilities, including PG&E, that rely on the fund also weakens. Furthermore, when the fund is fully depleted, the utilities also lose the protection of the liability cap. These outstanding risks directly impact the credit quality of California's investor-owned utilities.

Because of these risks, as you see on the next slide, the ratings and outlooks for both PG&E and Edison are directly tied to the relative size of the wildfire fund. As you see on the next slide, if the California Earthquake Authority is correct that the Eaton fire could deplete the AB-1054 $21 billion wildfire fund, then, as you see on the bottom chart of the next slide, the wildfire fund balance would be reduced to only about $11 billion. Under such a scenario, S&P Global Ratings has indicated that we would likely downgrade Edison to the speculative grade, and then California's two largest utilities that serve about two-thirds of all of California's electric customers would be rated in the speculative grade. Getting back to recent developments, our base case assumptions for PG&E did not incorporate any potential legislative enactment that could reduce wildfire risk.

Therefore, as you see on the next slide, when the legislation session concluded without any further wildfire reform, S&P Global Ratings rated PG&E and Edison. Now, Carolyn, with that brief background, PG&E did have an immediate response regarding the lack of legislative progress. As you see on the next slide, the company announced a new strategic review and some capital spending reductions. So Carolyn, regarding the strategic review, your CEO recently elaborated in an interview that the company could consider ring-fencing both generation and gas operations. These businesses are not exposed to wildfire risk, but are being financially impacted by their association with PG&E's wildfire exposure. First of all, can you please further elaborate on these potential initiatives?

Yeah. Thanks, Gabe. First, can I just take a minute to thank you for the invitation today, and particularly for sharing your perspective on wildfire risks and PG&E's credit. Your statement that you just made, about a single B scenario in the absence of wildfire reform is really deeply concerning, and it illustrates that the status quo does not work for our customers. I just want everyone, the listeners and you all, to know that we're absolutely resolute to do what we can to support credit quality, and we're advocating for the state to take necessary action. Now, to your question specifically, under our strategic review, we're evaluating the full range of options available to us. Now, the preferred path, and the easiest for everyone, is for legislation to get passed.

That opportunity isn't dead. While it's certainly uncertain, it's highly uncertain, we're still hopeful that policymakers may act on that this year. But outside that policy reform, under our strategic review, we're going to look broadly at capital allocation and all other options. As we've said, everything is on the table to make sure that we can meet our obligation to serve the state of California in a way that is affordable for our customers. Now, when we take a step back, what does that really mean? Our overall fundamental goal is to become investment grade and to be able to affordably deliver for our customers. We have launched the review to open up that dialogue with our regulator and the state about how we can do that.

Yeah. That's a good question. Maybe I'll just remind everyone, our PacGen minority sale proposal was filed in 2022, and that was under very different circumstances. The filing itself was, and the objective was narrowly focused on efficient capital raising. Today, four years later, we're in a very different situation. Importantly, there is a broad recognition that the status quo for us in California is completely unsustainable. That's why we'll be engaging with regulators and other stakeholders now to identify solutions that can help address these shared challenges. So PacGen, different time, different circumstances. Today we'll be working with our stakeholders and our regulators upfront.

Carolyn, I appreciate that perspective. As you see on the slide here, PG&E also announced about a $2 billion reduction in its capital spending plan for 2027. Could you please provide insight as to the rationale behind this decision? What are the company's objectives in reducing capital expenditures, and should investors anticipate further capital spending reductions?

Sure. Let me share. Given the current wildfire liability framework, and as we talked about, the resulting pressure on financing costs, we believe it's actually prudent to slow the pace of certain investments while we continue to fund the work that matters most, and that's focused on our safety and our compliance and serving our customers. As you've noted in some of your reports, the utility model was designed to enable both the robust infrastructure investment that the state needs and the and is important, strong credit ratings. That's what reduces the cost to ratepayers. That model's not working in California right now. As for future plans, when we think about what we're considering, as we've said, all options are on the table and are being explored as part of the strategic review, and that includes capital allocation and our capital, our program going forward.

Well, as we've already said, we're not going to sacrifice safety as we look at which work to delay or defer. That is, safety is going to continue to be priority number 1. But there are impacts to our 2027 plan, and those changes impact areas like new housing, interconnecting new renewable generation, serving large load. And in our operations, though, what's very important, again, is that we keep our focus on the strong execution and pursuing efficiency opportunities under the Simple Affordable Model, as you all have come to expect from us. I mean, you've seen our record over the last few years in terms of how we've executed and how we've been lowering our O&M.

But I'll say, honestly, it's painful for our coworkers, and of course, it's going to be painful for our customers as well, not to be able to deliver on some of this originally planned important work. We do our planning years out, and so to have made this decision is difficult for some of our coworkers who enjoy delivering for customers, and our customers are at our heart. But honestly, this is just another example why wildfire reform is absolutely so critical.