Pacific Gas & Electric (NYSE:PCG) is evaluating a broad range of strategic alternatives, including potential changes to capital allocation and business structure, as it seeks to strengthen its credit profile amid continued wildfire-related financial risk in California.
Speaking during an S&P Global Ratings webinar, PG&E Chief Financial Officer Carolyn Burke said the company’s preferred outcome would be additional state legislative action to reform California’s wildfire liability framework. However, she said PG&E cannot wait indefinitely for policy changes and has launched a strategic review intended to identify other paths toward investment-grade credit ratings and lower financing costs.
Wildfire framework remains central credit concern
S&P Global Ratings Managing Director Gabe Grosberg said California investor-owned utilities face risks that are higher than those of many utilities elsewhere in the U.S., citing drought conditions, wildfire exposure and the state’s interpretation of inverse condemnation. Under that framework, utilities can be held financially liable for fires caused by their equipment regardless of negligence.
Grosberg said California’s wildfire fund and liability cap have supported PG&E’s credit quality and contributed to a two-notch upgrade over the past 30 months. Still, he said the wildfire fund does not have an automatic replenishment mechanism, meaning utilities’ credit quality could weaken as the fund is depleted.
S&P said the California Earthquake Authority has estimated that the Eaton fire could deplete the $21 billion AB 1054 wildfire fund, potentially leaving about $11 billion. Grosberg said S&P has indicated it would likely downgrade Edison International to speculative grade under that scenario.
Burke said PG&E believes a sustainable framework needs two elements: a durable source of liquidity for claims outside the wildfire fund and a “true maximum disallowance or cap” that does not depend on the fund’s existence.
“The current framework does not work, and the status quo is not sustainable,” Burke said.
Capital plan reduced as PG&E preserves financial flexibility
PG&E has announced roughly $2 billion in planned capital-spending reductions for 2027. Burke said the company believes it is prudent to slow certain investments while continuing to fund safety, compliance and customer-service priorities.
She said the reductions would affect areas including new housing, renewable-generation interconnections and service for large loads. PG&E will not compromise on safety, she said, but delaying projects will be difficult for both employees and customers.
Burke also addressed questions about the strategic review, including whether the company could pursue separation or ring-fencing of its generation and gas operations, which are not exposed to wildfire risk in the same way as electric operations. She did not identify a preferred alternative but said PG&E would examine all available options and engage with regulators and stakeholders.
Burke distinguished the review from PG&E’s prior PacGen minority-sale proposal, which was filed in 2022 and was focused on capital raising. The current circumstances are different, she said, because there is broader recognition that California’s existing system is unsustainable.
Investment-grade goal tied to affordability
Burke said PG&E remains committed to maintaining funds from operations to debt in the mid-teens, with financial metrics in line with investment-grade utility peers. Achieving investment-grade status is important because it would reduce financing costs for infrastructure investment, she said.
PG&E has access to debt and equity markets, Burke said, but not on the same stable and low-cost terms available to higher-rated peers. She said the company’s shares are trading at more than a 50% discount to the utility sector and that investors have called for capital returns rather than new equity issuance.
PG&E estimates that higher debt spreads associated primarily with wildfire risk have resulted in approximately $4 billion of additional interest expense since 2017 over the life of its bonds, Burke said. Those costs ultimately affect customers, she added.
The company is pursuing what it calls its “Path to Flat” initiative, which aims to offset rate pressure through operating efficiencies, financing optimization, load growth and other measures. Burke said PG&E has reduced rates five times during the past two and a half years and has met or exceeded its target of reducing non-fuel operations and maintenance expenses by 2% annually for four consecutive years.
Operational wildfire mitigation continues
Burke said PG&E has gone about four years without a major wildfire incident associated with its equipment and remains focused on preventing catastrophic fires. The company has deployed measures including public safety power shutoffs, enhanced powerline safety settings, high-definition cameras, sensors and expanded coordination with CAL FIRE.
She said PG&E’s continuous monitoring center uses sensor and smart-meter data to identify potential equipment problems before they occur, allowing crews to conduct preventive maintenance. PG&E has also undergrounded more than 1,200 miles of lines and recently filed a 10-year plan seeking approval to underground another 5,000 miles from 2028 through 2037.
Separately, Burke said investors are closely watching PG&E’s Dixie and Kincade cost-recovery proceeding before the California Public Utilities Commission. The proceeding includes more than $675 million in costs paid by the wildfire fund and another $1.9 billion PG&E is seeking to recover outside the fund. Burke said a constructive decision would provide evidence that California’s wildfire framework can support predictable and timely recovery of prudently incurred costs.
About Pacific Gas & Electric (NYSE:PCG)
Pacific Gas and Electric Corporation, through its principal subsidiary Pacific Gas and Electric Company, is a regulated energy utility serving customers in Northern and Central California. The company delivers electricity and natural gas to residential, commercial, industrial and agricultural customers across its service territory.
PG&E’s operations include the transmission and distribution of electricity, natural gas distribution, and the maintenance and modernization of the infrastructure used to provide these services.
