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 negligence. 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 2/3 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 [inaudible] 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. Thanks for that question, Carolyn. That's really helpful. Just as a follow-on question, why do you believe this strategy will be successful given the company's previous unsuccessful attempt to sell about 50% of its generation in 2023?
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.
Oh, thank you, Carolyn. Given that capital spending reduction, what would be the impact to the company's operations?
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 one. 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.
Carolyn, thanks so much. We are receiving actually a lot of investor questions with regards to affordability. Also, we're definitely going to touch on PG&E's credit rating. But given that PG&E's issuer credit rating is currently in the speculative grade, the company maintains high capital spending, and interest rates are more recently increasing, how does the company manage affordability concerns?
Okay, so we love this question because affordability is top of mind for us, and as I said, our customers are at the heart of everything we do. Affordability continues to remain a key consideration in all of our long-term planning. In fact, internally, we have an initiative that we call Path to Flat, and we are rallying all of our coworkers for them to focus on offsetting rate pressures through operating efficiencies, financing optimization, load growth, and any other actions designed to moderate bill impacts and keep customer rates as flat as possible over time. Remember, in our Simple Affordable Model, we target rates from 0% to 3%, and so this is really focused on trying to get to that 0%. Compared with many of our peers, we've already taken meaningful steps to reduce rates. I think I've mentioned this before, but I love mentioning it.
We've reduced rates five times in the last two and a half years. But we're going to continue to make those investments needed to improve safety and reliability. Yeah. That said, wildfire reform remains the major and critical headwind for affordable rates. To quantify how that impacts rates over time, we actually looked backwards. We actually looked at our long-term debt issuance and measured our higher spreads due to wildfire risk compared to utilities with strong credit ratings. Okay, so we took this calculation, and since 2017, higher spreads on PG&E debt issuances, and this is primarily due to wildfire risk, have locked in approximately $4 billion of additional interest expense that will be borne by our customers over the life of those bonds.
To us, it's really clear that we need action from California to support our credit quality and to ensure our ability to affordably finance investment in the state.
Okay. Piggybacking on that, with the stated goal of reaching investment grade, why is attaining investment grade so important to PG&E, and what steps are required to reach this goal? Is it feasible to achieve investment-grade status without further wildfire reform?
Okay. As I said, customers are at our heart. Becoming investment grade is important to us because it's important to our customers and affordability. Strong ratings help customer affordability through the lower financing cost for our infrastructure investments. It is the prime example of efficient financing, which is a key component of the Simple Affordable Model that we've talked about. That is our value proposition. We've been working really hard to get to IG over the last five years, and we are very proud, and I'm very proud of the progress all of our coworkers have made, both operationally and when you look at our wildfire risk and the management team that's been put in place and on improving our balance sheet and our credit metrics. I think you all would agree that we've done all the things within our control to achieve investment grade.
Since the fires in Southern California, the focus is on wildfire reform and action to ensure a durable construct. We're continuing to advocate for those changes, as I've said. Honestly, we can't keep waiting for them, and that's why our strategic review has been announced. We find that the strategic review is actually opening the aperture for other pathways to achieve investment grade and a sustainable cost structure for our customers.
Carolyn, thanks so much for that. We're actually receiving a lot of investor questions with regard to capital market access.
As you see on the next slide, utilities such as PG&E typically operate with significant cash flow deficits. That's on the next slide, please. Due to substantial capital spending requirements, making consistent and full access to the capital markets critical for maintaining credit quality. Given PG&E's recent decline of approximately 30% in equity valuations following the conclusion of California's legislative session and the absence of any additional wildfire reforms, do you believe the company continues to have full access to both debt and equity?
Yeah. Thank you for that question. It is a really important one. It is really important for our regulators and our legislature as well to hear this answer. We may have access to both the debt and the equity capital markets, but it is not in the same stable, low-cost manner as our utility peers. Beyond the sub-investment grade ratings, today our stock is trading at more than a 50% discount to the utility sector. And that valuation gap means we cannot access capital at the same cost as our peers. The reality today is that equity investors are not just asking us to avoid issuing new capital, they are actually asking us to return their capital. We hear that. I was just at a conference last week, and I heard that. That is an extraordinary dynamic for a regulated utility designed to attract, not repel, investors.
We think that this is the situation that should be extremely concerning to policymakers who want stable, low-cost utilities to provide infrastructure for California. As I keep saying, we are working hard to advocate for those changes.
Thank you, Carolyn. Just turning to slide 18, turning to regulatory filings. In November of 2025, PG&E initiated the first catastrophic wildfire proceeding involving the presumption of prudence under AB 1054, Assembly Bill 1054. The California Public Utilities Commission's review of this application includes costs paid by the wildfire fund totaling over $675 million, as well as an additional $1.9 billion in costs PG&E seeks to recover that were not covered by the fund. Could you explain to our audience the significance of the commission's order for PG&E's credit quality, and discuss its broader credit implications?
Yeah. You are talking about our Dixie, Kincade cost recovery proceeding. We actually expect a proposed decision from the CPUC next month in November, and it is the first test of the new prudency standard established back in 2019 by AB 1054. This proceeding is being closely watched by investors and lenders who are looking for evidence that California's wildfire framework provides predictability and supports timely recovery of prudently incurred cost. A constructive outcome here would reinforce the confidence in that framework and reduce uncertainty around wildfire cost recovery. Of course, because of that, it would then support continued access to capital that we need. That is why we think it is so significant. That is why we think investors and lenders are also thinking it is so significant.
Fantastic. Thank you. Just moving on to the company's financial measures. As you see on the slide, FFO to debt has been maintained at about 13% since 2024. For our fixed-income investors, do you expect any improvement to this financial metric over the next five years?
Okay. Well, that is a good question, and it is a pretty easy one. In all of our scenarios, we completely remain committed to mid-teens FFO to debt, and metrics that are in line with investment-grade peers. This is, as I said, consistent with the fundamental goal of achieving investment grades that we have been very clear about all along the way. It is actually a principle that underpins our strategic review.
Thank you for that comment. The company has now gone about four years without a major wildfire incident associated with its equipment. Operationally, PG&E has implemented measures such as PSPS, EPSS, high-definition cameras, and enhanced communication with CAL FIRE. How would you assess the company's current operational capabilities in terms of its ability to prevent causing a severe wildfire?
Yeah. We continue to remain absolutely laser-focused on these capabilities and building them out. We actually have a stand at PG&E, and it's that catastrophic wildfires shall stop. Full stop. It's not wildfires shall stop in California. It's not that wildfires should stop being caused by PG&E equipment. It's that catastrophic wildfires shall stop, and we absolutely mean it. We've invested in our layers of protection, and we're seeing that investment pay off, as you just mentioned, four years without a major wildfire incident. But our work is never done in this area. We're never satisfied, and we keep looking for additional tools to add to our toolkit. We also view wildfire season as year-round, and our posture is to be able to prevent and respond regardless of the weather conditions. Our continuous monitoring center is producing amazing results. It's really cool.
Happy to have you all come and visit if you haven't seen it yet. But the continuous monitoring center is giving us an ability to use our sensors and our smart meter data to predict actually where breakdowns on the system are actually likely to occur before they happen. This allows us to then proactively dispatch crews to address the issues before they become real issues. Not only is that significant in terms of our stand in preventing catastrophic wildfires, but it's an affordability lever as well because it's far cheaper to do that preventative maintenance than to do the reactive type of work after an ignition. In addition to that, in addition to our continuous monitoring center, we've also undergrounded over 1,200 mi.
We just filed last week, I think you probably have seen our 10-year undergrounding plan seeking approval to underground an additional 5,000 mi from 2028 to 2037. Again, we're never satisfied. We're going to keep adding to those layers of protection, and we love to share that with our utility industry and our fellow IOUs that are dealing with wildfire risk.
Carolyn, thanks so much for those insights. Let me ask a question that everybody's speculating these days. Do you anticipate a special legislative session? More importantly, if a special session is not convened and there are no additional wildfire reforms that are enacted during the Governor's remaining tenure, how likely is it seemingly contentious issue of wildfire reform?
Yeah. Our investors are in a lot of different ways to us. We're not putting specific percentages on the likelihood of a special session getting called. But I will say it's still an option, and we've seen the Governor continue to be committed. In fact, we know that this issue is still very much front and center for Governor Newsom, who has indicated publicly that more work is needed, and that reform needs to happen either during his term or during the next Governor's term. This issue is, again, unsustainable. Newsom has called it out. Becerra has mentioned that he is aware of the untenableness of the situation. We also believe that right now, the case for change has never been stronger. There's also broad recognition that the status quo is not sustainable.
You've seen that in the CEA report, and the CPUC has been also very supportive of taking action now. But as we said, we can't wait. In the meantime, we will continue to consider other alternatives under our strategic review. We do think the easiest path forward is a legislative action in the special session, but again, if that does not occur, we will continue with our strategic review and looking at other alternative options.
Okay. Thanks for that, Carolyn. Just switching gears a little to the pending electric and gas rate cases you have before the CPUC. You've requested approximately $4.5 billion revenue increase over four years. That's a multi-year rate increases. However, the Public Advocates Office and the administrative law judge have recommended substantially lower rate increases. What is your perspective on the pending rate cases, and given ongoing affordability concerns, do you anticipate any significant challenges or complications?
Well, as we've discussed earlier, affordability is top of mind to us. It's really important, and it's a shared goal that we have with our commission. Have I mentioned we've reduced electric rates 5x since January 2024? We've also exceeded our non-fuel O&M goals. We have a target of reducing non-fuel O&M by 2% each year, and we've been able to meet or exceed that four years running, and we're on track for our fifth year this year. This Simple Affordable Model really does work. Our 2027 GRC rate case, I'll just remind you, if approved in full, would keep bills flat to 2025. We've seen a decrease in 2026, but rates would be flat from 2025 with this GRC rate. It's the lowest revenue requirement increase by any utility that's been requested in over a decade.
We feel like we've presented a really affordable filing that meets the needs of our customers, and it's affordable.
Carolyn, thanks for that. Speaking of affordability, currently in California, shareholders and ratepayers for the investor-owned utilities are effectively assuming the roles of insurers of last resort for anything related to wildfire risk. In your view, is this model sustainable over the longer term? What, if any, are the viable alternatives that should be considered?
No, absolutely not. We believe, along with all the other California IOUs and a broad coalition, that policy reform is needed, because the current framework does not work, and the status quo is not sustainable. If I were to boil it down to what we need, it's two things, right? It's a durable source of liquidity to pay claims that is outside of the fund. The source of liquidity is outside of the fund. Two, there's a true maximum disallowance or cap that is outside of the existence of any wildfire fund. We believe that these are the two items that will ultimately give investors and lenders the ability to quantify and price the tail risk in California, and it will ultimately open the door for further credit ratings progress, and will lead to customer affordability, which is, again, ultimately our long-term goal here.
Okay. Thank you. The California Earthquake Authority's April 2026 report indicated that the Eaton fire may well deplete the $21 billion wildfire fund. If this scenario were to occur, S&P Global Ratings has indicated that it would then likely downgrade Edison International to the speculative grade. In such a scenario, about two-thirds of California's electric customers would be served by utilities rated in this speculative grade. Given affordability concerns, what would be the potential impact on California's electric customers?
We've been really clear on this, Gerrit, that investment-grade access to the capital markets is critically important for us, and it's critically important for the state. Every large investor-owned utility in the country has strong investment-grade ratings, and there's a good reason for that. Lower ratings and the associated higher financing costs ultimately translate into higher costs to fund the investment that California depends on. We're seeing this in 2027. The status quo is slowing our ability to do important work for our customers, to provide them with strong customer service, to meet the growth needs and the decarbonization goals of the state. That's why establishing a very durable wildfire framework is so important for our customers and for the state. We've been very clear about that.
Okay. We're a little bit over time, out of time.
Okay.
We really sincerely want to thank Carolyn so much for joining us today.
Thank you.
As part of this larger CFO series, we also want to thank our very large audience again for attending. Today's webinar was recorded for replay and will be available on our website. You will also receive an email later today with a link, so you may access it at your leisure. Your feedback is very important to us, and a survey is available at the bottom right side of your screen and will pop up automatically once the session ends. We would appreciate it if you could please kindly complete our survey positively. We hope you are enjoying our CFO series, and we look forward to meeting you in person at next month's EEI's conference, which will Thank you, and have a good day.
Thank you.