By Jack Hough

If a moving company boasted about going 90 days without dropping a grand piano on a customer, you might have questions. How about upright pianos? And what happened 91 days ago?

Likewise, PG&E calling out in its Thursday earnings announcement a "second consecutive year of zero major wildfires caused by the company's equipment" might not make anyone's list of great corporate milestones. Only two years? What about minor fires? But this is a win for CEO Patti Poppe (pronounced like poppy), and an important message for her to promote -- especially now, with the stock tanking over recent fires that weren't even in the company's territory.

J.P. Morgan points out that the stock is trading at its biggest discount in years. BMO Capital Markets recently initiated coverage with an Outperform rating. Its price target implies 50% upside. More on that in a moment.

PG&E, or Pacific Gas and Electric, is California's largest distributor of both necessities, covering roughly the northern two-thirds of the state. Combine more than 100,000 miles of high-voltage lines with a vast, woodsy state that is becoming hotter and drier, and there are going to be fires. PG&E pleaded guilty or settled or paid fines for its involvement in blazes so fierce, destructive, and in some cases deadly that they have names: the Camp Fire in 2018; Kincade and Easy in 2019; Zogg in 2020; Dixie in 2021.

Poppe took over in January 2021, six months after the company emerged from bankruptcy. She estimates that the company has reduced its fire risk by more than 90%. This has meant covering some lines and burying others, while taking down trees and putting up stronger poles. And yes, small fires -- at least one linear meter -- are still common, even though PG&E has reduced them by more than 75%. "Every utility has ignitions," says Poppe. "Our stuff sparks. It's electrical. We do everything we can to minimize that risk, but by design it will spark." The key is to put out small fires early, so PG&E has installed hundreds of cameras and other monitoring devices.

The improvements have almost, but not quite, allowed Poppe to take off her fire hat and focus investor attention on the business of charging for electricity and gas. Trends there are mostly favorable. Core earnings per share rose 11% last year to $1.36, largely on cuts made to operating and maintenance expenses. Operating cash flow surged to $8 billion from $4.7 billion. Soaring electricity demand from new data centers -- PG&E's coverage includes Silicon Valley -- is bringing the fastest growth in years. The company predicts 10% growth in earnings per share next year and at least 9% a year from 2026 through 2028.

That leaves PG&E shares at a modest 10.6 times this year's earnings consensus, at a time when utilities have become Wall Street darlings. Money flooding into artificial-intelligence stocks has made its way to the companies providing the watts. The Utilities Select Sector SPDR, an exchange-traded fund that tracks a basket of power and gas blue chips, has returned 36% over the past year, beating the S&P 500 index by 12 points.

That brings us to January's Eaton and Palisades fires, which ravaged neighborhoods around Los Angeles and put an abrupt end to what was a steady, three-year recovery in PG&E's stock price. The shares are down 21% year to date. That's a big reaction, considering that L.A. isn't PG&E's territory; the city has its own municipal power company. Surrounding areas are covered by Southern California Edison, the largest subsidiary of Edison International. That stock is down 35% year to date. SoCal Edison says it doesn't yet know the cause of the Eaton fire, but that it found irregularities in equipment operating near its origin.

There is some rationale for PG&E investors to worry about another company's fire. Since 2019, both companies, along with San Diego Gas and Electric, have been part of the California Wildfire Fund. It collects funds from the utilities and their customers, and has the ability to pay $21 billion in claims. The L.A. fires, which will rank among the most expensive ever, could cost more. Not nearly all of the cost will come from the fund, and for utilities, there is a liability cap based on their equity rate base, an industry measure of assets. For SoCal Edison, it's just over $3 billion. Still, investors are worried that fund levels will need to be increased, and utilities will have to pay.

What happens next will depend on the course of the SoCal Edison investigation, and perhaps on California lawmakers making changes to the wildfire fund to deal with more extreme losses than they had originally envisioned. Poppe says the California Wildfire Fund is the most advanced mechanism of its kind to deal with utility fire liabilities. One key to the law that created the fund, says Poppe, is that it sets a new prudency standard that utilities must meet in advance through inspections.

"We've never been safer," says Poppe. "We're still going to get safer every day, and the financial protections for investors need to be clear and appreciated. Nothing like a market to tell you what perception is."

J.P. Morgan reckons that gross liabilities related to Eaton will come in at $16 billion, and that after settlement reductions and other adjustments, the hit to the California Wildfire Fund will be $8 billion to $9 billion. "We anticipate a policy and/or regulatory response could catalyze a return to prior levels," its analysts recently wrote of the shares. They prefer PG&E, given its lack of direct involvement in the L.A. fires.

BMO Capital calls PG&E a "rare deep-value opportunity with premium visible growth." It predicts a rise from a recent $15 and change per share to $23. The current dividend is too small to mention, but based on company goals and Wall Street projections, an annual payout of 50 cents a share looks feasible within four years. Calculated against the recent stock price, that would make for a 3.2% yield.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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February 14, 2025 15:21 ET (20:21 GMT)

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