UBS Upgrades Pacific Gas & Electric: Top Quartile Growth And Reduced Wildfire Risk in Focus

UBS Securities analyst Gregg Orrill upgraded Pacific Gas & Electric Co PCG from Neutral to Buy, raising the price target to $21 from $19.

The analyst is optimistic about the stock owing to top quartile EPS growth of 9%, improving credit metrics, and better wildfire risk mitigation.

The analyst notes that decarbonization and wildfire mitigation goals drive top quartile 9% rate base growth in California, and management has committed to O&M expense reductions.

PCG has significant cap-ex drivers of wildfire mitigation driven by undergrounding and electrification to contribute to the state's net zero 2040 goal, the analyst notes. 

PCG expects the plan to increase cap-ex spending per year beyond 2027 to $13 billion per year from $9 billion per year currently, the analyst adds.

Orrill thinks that PCG significantly contributes to the state's policy goals and should receive fair treatment, including the undergrounding plan. 

The analyst forecasts a 350 bp FFO/debt improvement from 2022 to 2024 driven by the rate case, wildfire mitigation recoveries of $1.8 billion by 2024 ($0.5 billion approved and $2.1 billion requested) and tax benefits from Fire Victim Trust share sales.

PCG calculates they have lowered the risk of a major wildfire with their equipment by 90% since 2017-2018 and by 94% based on the California Public Utility Commission's Safety Model Assessment Proceedings.

In 2023, wildfire mitigation utilizes downed conductor detection, voltage force out, and transmission controls. The company does not have significant legacy wildfire liabilities to resolve, the analyst adds.

Price Action: PCG shares are trading higher by 2.5% to $17.51 on the last check Monday.