PCG - PG&E Investor Day: Potential Dividend Reinstatement And Reduced Wildfire Risk

2023-06-09 07:27:59 ET

Summary

• PG&E Corporation held an investor day on May 24th.
• PG&E has implemented changes to reduce wildfire risks, including adjusting recloser operations to minimize ignition chances.
• The company plans to spend over $110B in CAPEX over the next ten years, but expects to keep rate increases equal to inflation.
• PG&E is expected to reinstate dividends with the release of Q3 results, with a focus on conservative growth as they reestablish themselves post-bankruptcy.

On May 24th I was able to attend PG&E Corporation's (PCG) investor day in California. (Investor Day presentation can be found here .) The biggest focus of the meeting was on PCG's work to reduce wildfire risks. Drones were on display for monitoring power lines and substations to look for problems. They also displayed new conduits that would be much cheaper and faster to install. But the most impressive part of the day was a demonstration of how they operated the protection devices on their electrical distribution system.

At PG&E's technology center we were able to see how changes in recloser operations have reduced fire risk. Reclosers are essentially a type of circuit breaker located on distribution lines. They get their name because after opening when detecting a fault they close again to see if the fault has cleared on its own. Typical industry practice is to have a recloser open and close two or three times before permanently opening. The sensitivity and speed at which a fault is detected can also be adjusted. Setting the sensitivity level of protection devices is a tricky engineering problem. Too sensitive and customers experience lots of unnecessary momentary and sustained outages, but not sensitive enough and you risk equipment damage. The initial fault detection typically takes a few seconds so the equipment truly "knows" that there is a problem. The reclosing operations then take place much more quickly because there already is a known problem at the location.

So, if a tree branch falls on a line, it is getting zapped with electricity a few times before the circuit finally opens for good. Each time creates a risk of ignition to the tree branch, especially in dry windy conditions.

This recloser operating practice has been standard procedure for decades. When I worked in the Distribution Engineering department at Baltimore Gas & Electric in the 1990s, this is how our reclosers operated. There are a number of reasons why a utility would want to operate their system this way. By having the system reconnect on its own, customers have only a quick momentary outage, instead of a sustained outage that could take hours to get service returned. Not having to send a service crew out to restore service also keeps costs, and therefore customer rates, down.

PCG's new procedure during times of high wildfire risk is for the reclosers to operate after just 0.1 seconds and to not reclose. PG&E demonstrated the new and old approaches during our visit. Under the old procedure a branch across two power lines gradually caught on fire, and then a large electric arc traveled down the power line as the circuit was turned off. More smoke came from the branch with the successive operations of the recloser. When we saw the new procedure there were absolutely no signs of smoke or fire on the branch the entire time.

As you would expect, PCG said they are experiencing more sustained outages when operating this way. However, the outages on these circuits have been averaging under three hours, so they haven't created too much of an undue burden on these customers. Also, PCG is only operating this way during high wildfire risk periods, so for most of the year these customers should be experiencing standard levels of reliability.

I feel this operating change has significantly reduced the wildfire risk in PCG's territory. It should be much more difficult for a fire to start if something falls across a wire, or if a wire is knocked down to the ground. However, it only takes one mistake for a fire to start, so you can't say that the risk has fallen to zero. One improper operation of a protective device could be all it takes for another disaster to occur. But with the new operating protocol, it seems like it will take an equipment failure to cause a fire, while, previously, standard operating procedures had significant fire risks.

After the technology demonstrations, PCG gave a presentation about fires and other issues related to the company. One of the speakers was the President of the California Professional Firefighters union. He was very adamant that the PCG was doing the right things and being a good partner in trying to get the wildfire problem solved. I had a chance to talk with him after his presentation, and he said that not only is PCG reducing wildfire risks, but other state organizations are also making helpful changes.

Of course, all of the changes that PCG has underway are going to cost a lot of money. They plan to spend $52B in CAPEX over the next five years, compared to the $39B they spent over the last five years. PCG also announced another $67B in spending in the five years starting in 2028.

All of this spending will lead to higher customer rates, but PCG feels there are ways to mitigate any rate increases. In particular, PCG highlighted that they are in the bottom quartile when it comes to non-fuel O&M expenses per customer.

While it is not great to be fourth quartile, it means there is lots of opportunity to reduce costs. PCG feels these reductions will keep annual rate increases equal to inflation. PCG spent a significant part of the presentation going through examples of recent waste elimination projects to show the scale of these savings opportunities.

So if everything works properly, this could be a big win-win for customers and investors, with customers receiving safer service at a reasonable price while investors get significant earnings growth.

One other item to mention from the Investor Day is dividend reinstatement. The company suspended the dividend in 2017, and the bankruptcy settlement forbid reinstatement for at least three years. Management feels that the requirements from the bankruptcy agreement for reestablishing the dividend will be met in the third quarter, and that they will likely announce some type of dividend when the third quarter results are released. However, PCG would not really commit to specifics about the dividend. They just said they will start at a low level. They want to be conservative with the dividend as they reestablish it, and only expect to grow the dividend as earnings grow in the near term. You should probably expect a below-industry payout ratio for a while, as they reestablish themselves post-bankruptcy. However, since their outlook is for faster than industry level growth, the dividend could still rise relatively rapidly.

Conclusion

The investor day was a really positive meeting. The big takeaway is that changes in PCG operations have dramatically reduced wildfire risk in their system. You can't say that the risk is eliminated, because it only takes one error to start a fire, but the risk is probably far lower than the stock market has priced into the stock.

The changes underway at PCG should create industry leading EPS growth and a safer system at a reasonable cost. These factors along with reinstating the dividend should lead to a positive stock performance over the next few years.

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