PG&E - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 came in steady operationally with flat GAAP EPS year over year ($0.24) and core EPS at $0.31, while revenue declined modestly YoY to $5.90B; management reaffirmed 2025 non-GAAP core EPS of $1.48–$1.52 but trimmed GAAP EPS to $1.26–$1.32 on higher non-core items tied to SB 901 and wildfire-related costs.
• Against S&P Global consensus, EPS was essentially in line (0.31 actual vs 0.316*) and revenue missed (actual $5.90B vs $6.24B*), reflecting lower commodity pass-throughs and cost-of-capital/dilution headwinds offset by customer capital investment and O&M savings.
• Strategic posture remains constructive: data center pipeline rose to 10 GW (from 8.7 GW in Q1), Rule 30 interim approval accelerates large-load connections, and equity needs are “fully satisfied” to fund the $63B 2024–2028 plan; no additional equity expected through 2028.
• Near-term catalyst focus: California wildfire framework/affordability legislation (management expects “meaningful measures”), cost-of-capital decision for 2026 ROE, and continued evidence of bill stabilization/decline into 2026–2027 supporting the “simple, affordable model” narrative.

What Went Well and What Went Wrong

• What Went Well

  • Reaffirmed 2025 core EPS guidance ($1.48–$1.52) with a bias toward the midpoint; reiterated at least 9% core EPS growth annually in 2026–2028 and no further equity through 2028.
  • Data center pipeline expanded to 10 GW; management reiterated each 1 GW can reduce electric bills by 1–2% over time; CPUC granted interim implementation of Rule 30 to expedite large-load connections.
  • O&M execution: on track to meet or exceed 2% non-fuel O&M reduction target; CFO cited “nearly 100 initiatives” driving savings, with AI improving inspection/vegetation workflows.
  • Quote: “Our bills went down this year, and our forecasts show residential combined bills to be essentially flat for the remainder of 2025 and going down again in 2026.” – CEO.

• What Went Wrong

  • GAAP EPS guide lowered to $1.26–$1.32 (from $1.29–$1.35) on higher non-core items (SB 901 securitization, wildfire-related costs); wildfire-related Kincade/Dixie claim costs rose y/y.
  • Revenue below consensus; Q2 operating income declined vs prior year (to $1,096MM from $1,134MM), reflecting lower authorized ROE (10.28% vs 10.7%) and equity dilution partially offset by higher rate base.
  • Policy uncertainty remains near term around AB 1054 enhancements and affordability package; management opposes securitization proposals viewed as raising long-run costs.

Transcript

Operator (participant)

Thank you for standing by, my name is Eric, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PG&E Corporation Second Quarter 2025 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. I would now like to turn the call over to Jonathan Arnold, Vice President, Investor Relations. Please go ahead.

Jonathan Arnold (VP of Investor Relation)

Good morning, everyone, and thank you for joining us for PG&E's Second Quarter 2025 earnings call. With us today are Patti Poppe, Chief Executive Officer, and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides, along with other relevant information, can be found online at investor.pgeecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended June 30th 2025.

With that, it's my pleasure to hand the call over to our CEO, Patti Poppe.

Patti Poppe (CEO)

Thank you, Jonathan. I am pleased to be with you this morning to share another solid quarter of execution. Our core Earnings Per Share are $0.31 for the second quarter and $0.64 for the first half of 2025. Like last quarter, this is light relative to a full-year run rate due to timing factors. It is, however, consistent with our internal plan, and I remain confident in reaffirming our full-year guidance range of $1.48-$1.52, with a bias toward the midpoint, which is up 10% over 2024. Top of mind for us, and likely for you too, are matters before the California State Legislature, specifically improving upon the AB 1054 wildfire construct and landing sensible affordability legislation. I'll start with AB 1054. Key decision-makers are currently focused on ensuring there is a mechanism to protect the wildfire funds' durability.

I'm confident that meaningful measures will be enacted this session sufficient to address downside risk and improve upon the status quo. It's also becoming increasingly clear that the state, just as it has done before with earthquake risk, really needs a longer-term comprehensive societal approach to catastrophic wildfire risk in the context of our changing climate conditions. This will take longer than the next six weeks, but a constructive step forward this session will need to provide the necessary protections in the interim and give clear direction for substantive next steps. Keep in mind, as with AB 1054, the IOUs would need to opt in to any additional wildfire fund contributions. As such, any replenishment framework would need to be part of a package which improves upon what we have today and also sets the stage for comprehensive reform.

Next, regarding legislative proposals to address affordability, we are 100% aligned with our legislature on the goal of affordable service for our customers while not compromising on safety or reliability. Where we differ is on the most effective means to achieve our shared goal. There are some elements in the proposals which we firmly support, for example, moving funding for public purpose programs off the utility bills. As we've seen in many prior sessions, initial language tends to evolve significantly by session end, resulting in better long-term outcomes for customers and investment in California. I'm confident that this can happen again in 2025. There is simply too much at stake for the state to not push forward to make the most constructive policy choices possible.

As evidenced by our 2027 general rate case proposal, our business fundamentals and core execution have never been stronger, and our simple, affordable model is providing the framework to continue funding needed investment while holding customer bills at or below the rate of inflation. As a reminder, the legislature is out on recess through August 18, after which they return for what is typically the busiest part of the session, wrapping up on September 12. Based on what we see today and having modeled a range of potential outcomes, we're pleased to reaffirm our current five-year financial plan through 2028. For EPS growth, 10% this year and at least 9% each year 2026 through 2028. $63 billion in capital investments, no change to our financing plan to fund this capital growth, including no further equity through 2028, and continuing to target reaching a 20% dividend payout by 2028.

While we're not providing specific details beyond 2028 on this call, we remain confident that the simple, affordable model can continue to drive sustainable savings for customers and earnings growth for investors for years to come. Once we have legislative clarity, we look forward to sharing more of the details with you and rolling forward our plan. Also unchanged is our focus on physical and financial safety, our prioritization of customer affordability, and our firm commitment to enabling California's growth and clean energy ambitions. Turning here to Slide five, our improving layers of physical protection ensure our hometowns are safer today and will be safer still tomorrow. We have a substantial suite of wildfire mitigations currently in place, aimed at both ignition prevention and post-ignition response, and we continue to learn and improve upon existing mitigations year-over-year.

For example, I'm particularly excited about our deployment of more than 10,000 sensors throughout our high-risk areas. These sensors, attached to our poles with four screws, can be installed in about five minutes and provide data with very tangible results for customers, including detecting potential failures before they occur, preventing ignitions, and shortening outage durations. In addition, we've expanded our PSPS model to assess fuel risk beyond the traditional high-risk boundaries, and when conditions warrant, we won't hesitate to include such areas in a proactive power shutoff. We've executed four PSPS events already in 2025, all of which included transmission lines. In fact, as part of our June PSPS event, a total of 22 transmission lines were de-energized for safety.

Given the potential impact of the Eaton fire on wildfire fund durability, some of you have asked what happens if there's another big fire this year before new legislation goes into effect. As a reminder, for any fire in 2025, we would first turn to our customer-funded self-insurance, which addresses claims up to $1 billion. We're also able to request cost recovery from the FERC under our formula rate. Beyond the $1 billion threshold, we would turn to the wildfire fund, and beyond the fund, we would seek recovery from the CPUC under the Enhanced Prudency Standard. Importantly, PG&E has an annual safety certificate in place today. Clarifying one common misconception, if there are multiple events within a single coverage year which together exceed the fund's resources, then available funds would be paid out by the administrator pro rata and not on a first event, first paid basis.

Moving to Slide six, I want to reiterate that we share our state's desire to address customer affordability. In fact, we've been at it for a number of years, and we are on our way to delivering on that key priority. Our bills went down this year, and our forecasts show residential combined bills to be essentially flat for the remainder of 2025 and going down again in 2026. We also see a pathway for 2027 bills to be lower than they are today. Our rate case, as proposed, would result in customer bills being flat compared to current bills as GRC revenue increases are offset by reductions in other items. This is a darn good proposal, yet we're taking additional actions to lower rates even further.

For example, our flat projection does not include savings from the DOE loan facility, reduced borrowing costs when we achieve investment grade, and beneficial load growth allowing us to spread our fixed costs over more units of energy. We forecast the energy we provide will continue to be more and more affordable through the deployment of the simple affordable model. Over time, our customers will experience savings and notice the trend. Also, with electric bills expected to be on the rise nationally, affordability can become a positive differentiator for us, and we're looking forward to turning around the prevailing narrative with California regulators and policymakers. Another driver of affordability will be beneficial load growth. As you see here on Slide seven, our data center pipeline continues to grow. Last quarter, our pipeline reflected demand of 8.7 GW.

Now, adding interest from our second cluster study, offset by some attrition, we're actively working 10 GW through various stages. That's healthy growth since last quarter and a nearly 3X increase since this time last year. The 10 GW represent more than 50 different projects, many on the smaller side, consistent with the inference market. We recently filed for approval to serve Microsoft's planned 90-megawatt data center project in San Jose. This is just one of many smaller projects in our pipeline. I like to call our data center growth Goldilocks load. Not so much to be a problem, and yet enough to be beneficial for all of our customers. This is because our demand is differentiated by having a diverse set of projects, ensuring that our development pipeline remains robust and not reliant on a single location, counterparty, or approval.

While we value this diversification, we're also excited to be seeing data center operators express interest in some larger-sized projects, as well as locating beyond the Bay Area into other prime locations within our service area. The market has gotten the message. PG&E is ready to serve. This is good news for Californians who stand to benefit from this unprecedented growth. Our civic leaders recognize this opportunity too. Just last week, I had the pleasure of standing with San Jose Mayor Matt Mahan to formally announce nearly 2 GW of projects in the city of San Jose powered by PG&E. Our 10 GW pipeline enables California to create thousands of new construction and permanent jobs in the state, secure the future of AI and tech in California for decades to come, and generate billions of dollars in annual revenue for the state through increased property taxes and additional sales tax revenue.

We're particularly excited by beneficial load because every GW we bring online offers the opportunity to reduce electric bills by 1%-2%. The fundamentals of the PG&E operational story are strong and getting stronger. The proof is in our results, improving and building upon our physical layers of protection year-over-year, submitting a general rate case which delivers on our commitment to stabilize customer rates, and seizing the tremendous opportunity for customer affordability from data center load growth in our service area. With that, I'll turn it over to Carolyn.

Carolyn Burke (CFO)

Thank you, Patti, and good morning, everyone. Here on Slide eight, we're showing your earnings walk for the first six months of 2025.

Although core earnings of $0.64 are down from this point last year, as Patti mentioned, we're on track with our internal plan and confident in delivering on our 2025 non-core EPS guidance of $1.48-$1.52, with a bias to the midpoint. First-half results were impacted by the dilution from our December equity financings, in addition to the CPUC cost of capital phase two decision last October. Over the second half, timing items are expected to fully reverse, and we have line of sight of additional O&M savings. We have nearly 100 different initiatives, big and small, that are yielding savings and will continue to yield more savings this year. Turning to Slide nine, our 2027 general rate case is the lowest GRC % increase we've requested in 10 years and reflects our commitment to stabilize customer bills by deploying our simple affordable model.

With only a modest increase in base GRC revenues and an expected reduction in other items, we see a path for residential bills to be down in 2027 compared to today. This is the result of an intentional continuous effort to eliminate waste on behalf of our customers. In fact, in this filing, we highlight $2.5 billion in capital and expense saved across the enterprise from 2022-2024. These savings are being delivered across PG&E. We've rebalanced our use of subcontractors in gas operations. In electric operations, we've deployed tools to enhance our work bundling strategy and improved our new service application process to accelerate connections. As we've talked about before, we continue to find opportunities to reduce the cost per mile of undergrounding, including piloting new installation equipment. Our simple affordable model is enabled in part by annual non-fuel O&M cost reductions.

Annual savings exceeded $200 million in 2022, 2023, and 2024, and I'm increasingly confident we are on track to continue beating our 2% target this year and beyond. With continued strong execution in this area, coupled with efficient financing and beneficial load growth, we see a path to holding bill growth to 1%-3% while continuing to make needed capital investments on behalf of our customers. Here on Slide 11, we're reaffirming our $63 billion capital plan through 2028. Not included in the plan is an incremental at least $5 billion of customer beneficial work, much of which is FERC transmission. As we think about this $5 billion, I should emphasize we will be very mindful of our evaluation discount to utility peers, and I can assure you that we have no intention of issuing additional equity at these levels.

As you know, we have already issued the equity needed to fund our existing $63 billion investment plan through 2028, and we have achieved compliance with our authorized regulated capital structure. This gives us considerable flexibility moving forward. When it comes to capital allocation, I want you to know, first, we plan conservatively. Second, we have a number of options and have built a plan with several points of flexibility. Third, we think and plan long-term with our customers and the state's best interest at heart. Fourth, we will always be mindful of market conditions as they relate to funding the plan. Finally, to be clear, if the state did implement policy choices which significantly constrain our longer-term ability to deploy needed growth capital accretively, we would carefully consider whether it might be more efficient to return some capital to shareholders.

Focusing on proposals to securitize some of our capital investment, we strongly believe that this is not the right policy choice for our customers. Not only is it ineffective at delivering meaningful near-term customer savings, it also risks increasing our actual cost of capital, thereby driving up customer costs on the balance of our rate base, a significant unintended consequence. That said, we strongly support the goal of passing affordability legislation this session, and we're advocating in the legislature for policy choices that more effectively deliver on our shared goal of affordability. As Patti mentioned earlier, we've modeled a range of potential legislative outcomes for our current five-year plan, and we remain confident that we have sufficient financial flexibility built in to deliver on our earnings guidance. Our five-year financing plan shown here on Slide 12 remains unchanged.

The plan is built to support our customer beneficial capital investments while also sustaining investment-grade credit metrics. As we've said in the past, the $2 billion parent debt paydown by 2026 in our plan was not an obligation. We're reevaluating this element of our plan and will likely maintain the current level of parent debt through 2026. This decision gives us flexibility in our 2026 plans, and we're still forecasting mid-teens FFO to debt. Second, we have created flexibility to defer some long-term financing to 2026, depending on conditions later this year. We're continuing to indicate $5 billion of estimated utility long-term debt issuance in 2025. We've raised $3 billion of this so far, and following the extension of our revolving credit facility that closed in June, we have flexibility to manage the remaining 2025 maturities without returning to the market until 2026.

Reaching investment grade at the parent company will be a big win for our customers and continues to be a key focus for us. With the resulting lower future borrowing costs, investment grade is one of the most impactful and fast-acting affordability enablers, a point we will continue to emphasize in the context of the ongoing policy discussions. Last quarter, I mentioned that this was a big year for us in terms of regulatory filings. Two of those filings are behind us and moving through the process. First, the cost of capital application, which will set our CPUC return on equity for 2026. We believe we've made a strong case and look forward to a final decision before the end of this year. As a reminder, our filing is premised on the state delivering a constructive legislative fix for wildfire liability policy this year.

Second, the 2027 GRC proposal, which I've already addressed. Third, our 10-year undergrounding plan, which we intend to file by year-end. I'll end here on Slide 15 with a reminder of our value proposition, which we've reaffirmed again today. We're focused on execution, including on the policy front, serving our customers, and also delivering for our investors. I firmly believe that these commitments are not mutually exclusive. Today, we're standing for stabilizing customer bills and delivering consistent, predictable outcomes for all. With that, I'll hand it back to Patti.

Patti Poppe (CEO)

Thank you, Carolyn. While I acknowledge the questions prompted by the current legislative session, the fundamentals of the PG&E Playbook are undeniable. Strong layers of physical risk mitigation improving every day. Ample runway to continue reducing non-fuel O&M. Beneficial load growth serving customers and California's prosperity. Improving credit ratings and balance sheet health.

Our differentiated rate case proposal, all providing a path for customer bills to be flat to down in 2027 from today. As I like to say, performance is power. It is our responsibility to continue to demonstrate performance and earn the trust and cooperation of our legislative leaders so that we can follow through on our promise to perform. When we do what we say and continue to improve our performance, we have the power to influence perceptions and outcomes. I've never felt more certain about the PG&E Team and our ability to deliver both for our customers and our investors. With that, Operator, please open the lines for questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press Star, followed by the number one on your telephone keypad. We ask that participants limit themselves to one question and one follow-up question. Your first question comes from the line of Steve Fleischman with Wolfe. Please go ahead.

Steve Fleishman (Stock Analyst)

Yeah. Hi, Patti. Carolyn, good morning. Good morning. Just appreciated the comment on the confidence in achieving the growth under various legislative outcomes. Maybe just to be more specific there, I think concerns that we hear are things like the securitization proposals on the affordability bills and then potential equity needs to fund a new wildfire fund. Could you maybe be more specific on those issues and just, again, kind of if those were to pass, your confidence in hitting the growth rate?

Patti Poppe (CEO)

Yeah. Thanks, Steve. I'm very happy to clarify these questions. First, as we said, we've done a variety of assessments against a lot of legislative scenarios, and we are reaffirming our guidance through 2028. We feel very strongly that we've got the flexibility required.

What I will say is we continue to advocate on the affordability front that securitization is not more affordable for customers. In fact, it would result in bills going up, not down. We are definitely not supporting the securitization proposals, and there are some good proposals, though, and we'd be disappointed if good affordability legislation didn't get passed this year. I think our business model's a little complex, and for our policymakers, it takes a minute to understand how that sort of decision could actually negatively affect customers. We just continue to advocate and educate, and yet still make sure that we have a financial plan that can deal with any outcomes that might come through the legislative session. There are some things on affordability we do love that in the package, the public purpose programs could save $12 a month on a customer's bill. That's a big deal.

We think that some of the other things, like DOE, like debt financing for the transmission, could be a really good outcome for customers. We're going to continue to work together like we always do to make sure that we've done a good job advocating for the right affordability solutions. Now, on the equity needs for the wildfire fund, I'll just tell you, there's no reason to assume that an upfront payment would be required, and we definitely would not be supportive of issuing equity, particularly at our current valuations, to fund the wildfire fund. When we say we have to opt in, we want to make sure that what we're opting in is better than the status quo. The state has a pattern of doing the right thing. Our legislative process is a little noisy. We do it out loud here in California, and it definitely is public.

The good news is that means it's transparent and we'll get to the right end just like we have year after year after year after year.

Steve Fleishman (Stock Analyst)

Okay. I'll leave it there for others. Thank you.

Patti Poppe (CEO)

Awesome. Thanks, Steve.

Operator (participant)

Your next question comes from the line of Nicholas Campanella with Barclays. Please go ahead.

Nicholas Campanella (Director)

Hey, thanks. I really appreciate the time. Good morning. Good morning. I just wanted to pick it up from there. Not supportive of issuing equity to fund a wildfire fund solution, but just how are you thinking about the palatability to fund anything upfront at this point? I acknowledge that you also have, I think, some Holdco debt capacity that Carolyn alluded to, but maybe I can just ask how you're thinking about that. Thanks.

Patti Poppe (CEO)

Yeah. Thanks, Nick. I just think there's no reason to think that there would need to be a large upfront contribution.

The fund doesn't need cash today. Claims typically take years to pay out. It's important that we have the most affordable ways of supporting the wildfire fund. The fund has an important role. It provides the basis for a liability cap for investors. The durability of the fund matters. The liquidity of the fund, however, does not happen quickly. The claims don't pay out quickly. It doesn't put us in a position. I don't think there's a strong reason to assume that a big upfront payment would be required.

Nicholas Campanella (Director)

Okay. Thank you. You gave a lot of details on how you're thinking about. End of year and then 2026 financing. Can you just kind of remind us on where you kind of stand today on balance sheet capacity if we were just looking at it simplistically?

I think after you did the equity late last year, you kind of talked about having a $2 billion of Holdco debt capacity. Can you just remind us on where you stand now? Thanks.

Carolyn Burke (CFO)

Yeah. Hi, Nick. It's Carolyn. As you're right, we did do the equity in December, and our $63 billion plan is fully funded at this point in time. What we updated today is the timing of that $2 billion parent paydown of our debt. We do not intend to pay it down by the end of 2026, and this is what's giving us added flexibility in our 2026 plans. It does remain an element of flexibility in our plan. We still have it as being paid down by 2028. We're still targeting mid-teens FFO to debt, and we're there already, so we plan and intend to maintain mid-teens FFO to debt through 2028.

The percentage of that parent debt is relatively low versus our peers, and that continues to be an element of flexibility for us.

Nicholas Campanella (Director)

I appreciate that. I'm sorry to make you repeat yourself. Thank you.

Carolyn Burke (CFO)

Thanks, Nick.

Operator (participant)

Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Please go ahead.

Julien Dumoulin-Smith (Research Analyst)

Hey, good morning, Patti team. Thank you very much for the time. I appreciate it. Maybe to follow up a little bit on what was being discussed earlier, and obviously, the upfront acute needs to the balance sheet would be clearly unpalatable in the current environment. How do you think about a ratable or delayed contribution here? How do you think about the concept at all, right? Notwithstanding even the idea that it would be front-end loaded.

I just wanted to try to expand a little bit on the degrees of freedom that might exist here as you think about how to resolve the demands or tensions from the state, as well as any other possible directions that perhaps might not be obvious or visible here, if you will.

Patti Poppe (CEO)

Yeah. I think that it's important to remember what is the purpose of the wildfire fund. The wildfire fund is intended to provide smoothing for our customers, smoothing rates for our customers to fund that fund because under the inverse condemnation doctrine for a prudent operator, the claims are collectible from customers. Now, we don't think in the long run that's the right affordability picture for California given the wildfire risk that exists here in the state.

In the near term, we want to support that wildfire fund's durability because that wildfire fund also provides liability exposure protections for investors and for the IOU so that we can continue to be financially attractive and viable to deliver on California's clean energy ambitions and our AI leadership and making our system safer. The fund plays an important role for both customers and investors. How to maintain the durability of that fund could take a lot of different forms. We do think that longer-term payments and spreading out the costs matches the kind of pace at which the liquidity of that fund is required. We've seen that the funds and the claims get paid over a long period of time.

What's important to do here is make sure we spread out the costs over the longest period of time in a way that there's enough value to be provided to those who are harmed by the effects of wildfire.

Julien Dumoulin-Smith (Research Analyst)

A quick follow-up here. It's not necessarily obvious, but how do you think about inverse condemnation as being part of the reform conversation? We've seen it somewhat in adjacent states, but I want to ask in the context of tackling tort reform and IC specifically here. Is that part of the conversation here?

Patti Poppe (CEO)

I would say the path toward a more holistic solution certainly needs to go beyond utilities. California needs a holistic wildfire solution. Look, we need a functioning insurance market for customers. The spread of wildfire is what is the most expensive portion, and that needs to be modernized through defensible spaces, building codes, better forest management.

There's a holistic solution. Claims limitations definitely should be on the table. I think that the state has a real existential challenge here. Thankfully, we have a history of working well together here in California. The best solution will come when we stand together and find the path that protects and provides protections for those harmed by wildfire, but also prevents wildfire. We spend billions of dollars a year preventing an ignition. I'd say that the equal amount is not being spent to prevent spread. I think that's a state role that we need to play together to make our communities harden, just like we did for earthquake. We think there's other solutions that should be on the table and that we should look at. I would just suggest that inverse condemnation in its strict and most current form only fixes part of the problem.

We need a bigger solution for California. We're standing with California. We live here too. We want to make sure it's a safe and vibrant place that can continue the California dream. We need to make sure that we've got wildfire legislation over time that reflects that and enables it.

Julien Dumoulin-Smith (Research Analyst)

Thank you guys very much. Thank you, Patti. Best of luck here this fall.

Patti Poppe (CEO)

Thank you, Julien.

Operator (participant)

Your next question comes from the line of Richard Sunderland with JPMorgan Securities LLC.

Richard Sunderland (Equity Research)

Please go ahead. Hey, good morning. Thank you for the time today. Good morning. Turning to the data center pipeline and your San Jose announcements, can you expand on the San Jose update a little bit and particularly the path and timing to capturing some of those load growth benefits for customers?

I guess I'm thinking back to the 1 GW and 1%-2% math there and when that might be an opportunity to add it to your outlook.

Patti Poppe (CEO)

Yeah. We're so excited about this. We want to earn the right to serve our communities. San Jose, obviously, as I like to say, the smartest city in America. We're proud to serve San Jose. We've worked hard with the city to make sure that they can both accelerate permitting and the ability to do construction of data centers in San Jose and that we have the power to keep them on time. We see construction for most of those projects starting at late 2026, early 2027, or construction starting soon, but the actual load materializing in 2027 predominantly. Construction preparations will take most of 2026.

We'll see that pipeline both in San Jose then and across the rest of the service area taking shape 2027, 2028, 2029. It's very exciting. Once people found out that PG&E was ready to serve, the applications came rolling in. Our cluster study process has been very effective. Working with the City of San Jose has been a great catalyst for the state because the mayor, Mayor Matt Mahan, in San Jose is a real leader who really saw the benefits of this load growth for tax revenue and an ability to take advantage of. Believe it or not, there is land and space in San Jose to build, and we are taking advantage of that. The partnership was really important to us to accelerate the progress and to building out that construction and getting that load online. We would see the rate benefits probably starting in 2027.

Richard Sunderland (Equity Research)

That's very helpful. Expanding on those benefits, how are you thinking about tackling the affordability conversation in the legislature, given your outlook for 2026 and 2027 bills, and the points you just hit on the load pickup thereafter? Obviously, people are focused on the pressure right now, but you've also charted a path that could be different over the next few years. Do you see this affordability conversation as something that you can get to outcomes in this session, or do you expect a multi-session effort here?

Patti Poppe (CEO)

Yeah. I think we can get to it. I would be disappointed if we didn't get to affordability solutions here this session. There are good ideas on the table that we like a lot. That combined with our simple affordable model, in defense of our legislature, our rates have gone down and flattened this year, but that's the first they're seeing it.

That's a big change in trajectory here in California. Our rates forecast to go down would be a big change here in California. I think getting the timing right with our legislature, earning their trust is important. As I say, performance is power. We have to perform. We have to deliver those rate reductions. As we do, then they can be more confident. In the near term, there is work that the legislature could do to make bills more affordable in California. 30% to 40% of our bills are policy-driven. The legislature has a role and an opportunity to play a role in making energy more affordable here in California. Things like the public purpose programs coming off the bill, that's $12 a month for customers. There are other things, further NEM reform that would be important.

The way we finance a transmission on the debt side of that equation, we could do state-driven loans, much like the DOE does. Much like our DOE loan program office, that could do the debt financing for transmission. That would save customers and be a revenue raiser for the state. I think there's some really innovative solutions, and we appreciate the opportunity to work with the legislature to find the right solutions that actually benefit customers, both in the near term and longer term. I'd like to see that get buttoned up this session, to your point, Rich.

Richard Sunderland (Equity Research)

Very clear. Thank you. Thanks.

Operator (participant)

Your next question comes from the line of Anthony Crowdell with Mizuho. Please go ahead.

Anthony Crowdel (Managing Director)

Hey, good morning, team. Thanks so much for taking the question. Hi, Anthony. Hey, don't fall. I wanted to jump on Rich's question.

I appreciate it's transparent, the legislative process in California, and it's very fluid. Any thoughts on if we could see the solutions for AB 1054 combine or morph into also the affordability bills that are out there and we get one big package?

Patti Poppe (CEO)

It's a great question, Anthony. Look, we've got six weeks left. A lot of things will get combined. I do think it's good to look at the holistic impact both for customers and for the IOUs, make sure that we've got a package of solutions that work together this year.

Anthony Crowdel (Managing Director)

This is maybe a harder question to answer, and I understand if you don't want to answer it. You highlight that whatever comes out of the legislature related to the AB 1054 modifications, it's voluntary for all the utilities that want to opt in.

Obviously, questions earlier about maybe equity upfront or something is just something that you really would not sign up for. Are there any other items that you kind of want to see or don't want to see that would really cause you to think, "I want to really volunteer to sign up on this legislations?

Patti Poppe (CEO)

I think it's the totality of the package, Anthony. It has to net-net be better. It has to be better for customers. It has to be better for our IOUs, for our cost of capital. We want to make sure that it's net better than the current construct. I have confidence that we can find a net-better path. The wildfire fund is important to investors and customers. Its durability matters, and how it gets funded matters.

What I'm confident about is that we have the right policymakers who have the right mindset about how best to serve the people of California. We're going to work together to find the right outcome. We have confidence that they'll do the right thing in the end, and we're doing a lot of advocacy to make sure that the fund is durable and that that pathway to a longer-term fix, the real substantive changes in the legislative arena and here in California are meaningful, and we follow through on those. That's going to be an important part of what matters to us for agreeing to opt in.

Anthony Crowdel (Managing Director)

Great. Thanks for taking my questions.

Operator (participant)

Your next question comes from the line of David Arcaro with Morgan Stanley. Please go ahead.

David Arcaro (Executive Director and Equity Research)

Hey, David. Good morning. Let's see. Edison had an ALJ proposed decision that had recommended lower wildfire mitigation CapEx.

I was just wondering if you think that has any read across to you with your GRC? Could that influence how you prioritize different CapEx programs at all?

Patti Poppe (CEO)

As you know, Edison's proposed decision just came out, and we'll look forward to hearing their take on it. What I'll tell you about our wildfire mitigation plans: we continue to file our wildfire mitigation plans, and our GRC reflects it. We still intend to file our undergrounding plan later this year. I do think it's really important for the state of California that they see the value in undergrounding. Today, in our customers' bills, we spend $20 a month on vegetation management. Our customers do, and they only spend $1 a month on undergrounding. Undergrounding is the right permanent solution in our highest-risk areas, not everywhere, but our highest-risk areas.

I think it is important that we continue to show we can do it more affordably, that we can do it efficiently. We are showing that. We're showing our unit costs going down and our ability to deliver for customers improving. It is more affordable than our current construct of inspections and vegetation management year after year after year on those highest-risk miles. We know it reduces the most risk for the lowest cost. We're going to continue to advocate for undergrounding as a key part of the wildfire mitigation solutions here in California.

David Arcaro (Executive Director and Equity Research)

Okay. Great. Thanks so much. I'll leave it there.

Patti Poppe (CEO)

Thanks, David.

Operator (participant)

Your next question comes from the line of Carly Davenport with Goldman Sachs. Please go ahead.

Carly Davenport (VP and Equity Research)

Hey, Carly. Hey. Good morning, Carly. Thanks so much. Thanks so much for taking the questions. I wanted to follow up on the data center pipeline.

Just any thoughts on how we should think about your expectations on the conversion rate from early stage to final engineering to construction? Could that pipeline conversion shift if ultimately there are securitization provisions around energization spend?

Patti Poppe (CEO)

I would say, first of all, through what we've seen in our cluster one and cluster two, from the very first application to moving into construction, we're showing about a 50% attrition rate. That, I think, could carry through. Or perhaps as we start to build more and get better at it, maybe we are able to convert more of that into real beneficial load. I would say that it's early days to really have a strong prediction on attrition rate, but probably in about that 50% zone. I think as the legislative agenda comes to completion, we're going to want to make sure that we can serve that large load.

We're going to want to make sure because that's the best kind of CapEx. That CapEx reduces bills. I think we're going to want to make sure that we have means of including and the ability to finance that new CapEx and serve that large data center load. We're going to be advocating strongly for that. Great. Okay. Carly.

Carolyn Burke (CFO)

Maybe I'll just add that a lot of that is, remember, transmission. FERC-funded, not necessarily CPUCs there.

Carly Davenport (VP and Equity Research)

Got it. Okay. Great. Appreciate that color. I wanted to just ask quickly on the O&M reduction target, just given the commentary and the preparedness about potential upside relative to what you have kind of baked into the plan there. I guess just any specific opportunities that you would highlight driving that potential upside?

Carolyn Burke (CFO)

I'm sorry. Can you repeat that question, Carly? J

Patti Poppe (CEO)

ust the potential upside. Yeah, I'll take it, Carly. On the O&M. Sorry.

This is Patti. On the O&M, we see lots of potential for upside. One of the areas that we're excited about is AI, of course. Being able to deploy it, we've been able to dramatically improve our inspection process and reduce the cost to deliver that. We've got some new technologies we're deploying in our vegetation management area where we're able to really streamline how we use technology to get a better vegetation read at a lower cost. There are hundreds of projects. Carolyn mentioned hundreds of projects across the enterprise where people are deploying what we call waste elimination. It's the fifth play in our playbook. We have all sorts of small ideas and then large ideas. Self-insurance has been a continual benefit to customers, things like that, both on the big size and the small size.

I would say our O&M engine is just getting revved up, and you can count on us to be working hard to exceed that 2% target every year.

Carly Davenport (VP and Equity Research)

Great. Thank you for all the detail. Yep. You got it, Carly.

Operator (participant)

Your next question comes from the line of Ryan Levine with Citi. Please go ahead.

Ryan Levine (Equity Analyst)

Good morning. In your prepared remarks, there was mention of an— Good morning. Good morning. In your prepared remarks, there was mention of an interim study of a more holistic solution related to AB 1054, which was also referenced by several other stakeholders recently. How do you envision this process and any sense of what actually would be studied between now and presumably the end of the Governor's term?

Patti Poppe (CEO)

Yeah. We're looking forward to really partnering with the state to look at things like the insurance market.

How do we have a viable insurance market for customers in California? Do we have the right building codes? Do we have the right community hardening programs, forest clearing? We want to look at things like claims limitations. Other states are taking those actions to make sure that what is paid out in claims really goes to victims and not necessarily other participants in the process. We want to make sure that the California system is holistic, much like earthquake. Earthquake is an environmental hazard in California, yet building codes make it safer. We've got response plans. We do drills. It's a collective California approach to earthquake. We need the same collective California approach to wildfire.

We definitely want to be a key part in that study, that work, and put meaningful legislative actions and measures in place so that Californians can continue to experience the quality of life and certainty and affordability here that they're expecting.

Ryan Levine (Equity Analyst)

Great. One follow-up on the financing plan. How do you view the proposed decision related to SB 410 capital would be funded relative to plan? Any color as to how that interplays with some of the other drivers of your outlook?

Carolyn Burke (CFO)

Yeah, Ryan, it's Carolyn. A couple of things. Just remember that is just a PD, and so we still have to wait for the final decision, which could be voted out as soon as the end of August. Another important thing to remember is that the PD allows for additional funding up to $2.4 billion for 2025 and 2026.

Thanks to the SB 410 funding we received last year, we're actually on target to work through the backlog, and we continue to drive meaningful unit cost savings. As we've been saying, any new capital approvals would not necessarily be additive to our plan. While we could make the plan bigger, we could add to our capital plan. We may also look to simply make it better by prioritizing projects that benefit customer affordability, like energization. We could simply make our 9% growth plan longer in duration. Those are the choices that we have as we think about adding to the capital plan.

Ryan Levine (Equity Analyst)

Great. Thanks for taking my questions.

Operator (participant)

Your next question comes from the line of Greg Orill with UBS. Please go ahead.

Greg Orill (Analyst)

Morning. Morning, Greg. Yeah, good morning. Thank you. Just around the cost of capital proceeding.

Would you consider modifying your cost of capital position based on certain legislative outcomes? How much latitude is there within that proceeding in order to do that? Does the schedule allow for it? Thank you. Y

Carolyn Burke (CFO)

eah. Our filing that we made, we think we've made a very strong case within our request of 11.3. The filing did assume resolution on AB 1054. There is the possibility to have the ability to file an off-cycle application. At this point in time, as we've said, we're confident there will be resolution, that there will be constructive resolution on AB 1054. We believe that the right fix is a legislative fix. The schedule right now, we're pleased to see that there will be a final decision before year-end. Evidentiary hearings are at the beginning of September, and we expect a PD in November. Okay. Thank you.

Operator (participant)

Your next question comes from the line of David Frank with Zimmer Partners. Please go ahead.

David Frank (Analyst)

Hi. Good morning. Hey, good morning. Good morning. Patti, could you tell me, is your confidence of hitting the targeted earnings growth rate under different legislative scenarios underpinned by options for capital redeployment, such as regulated FERC transmission investments or stock buybacks, which at seven times earnings today is obviously accretive to investing in a rate base?

Patti Poppe (CEO)

Our plan and what our confidence is, is that we have optionality. We have a lot of options. We have a deep demand for capital for our customers and capital investment to serve this new data center load, to do energizations, to connect new businesses, to make the system safer, to make it more reliable, to continue to operate a safe gas system here in California, to operate our generating assets.

We've got lots of demand for capital on our system. We're going to make sure that we balance the needs of customers and the expectations of investors. Look, the IOU model is critically important for California. It's important for the safety of Californians. It's important for AI leadership in California. It's important for our clean energy ambitions. The IOU model is essential, and that IOU equity capital is essential. Our job is to make sure that policymakers and decision-makers understand that and value that like we do, and make sure that we have appropriate returns for investors. Being attractive to investors can take different forms, and we'll take those forms if necessary. Our primary confidence is born on a really effective legislative outcome this year, and that will drive our ability to further implement a simple, affordable model which delivers capital and earnings growth while reducing costs for customers.

We think that model is the winning solution for California.

David Frank (Analyst)

Got it. Sounds like a good plan. Thank you.

Patti Poppe (CEO)

Thanks, David.

Operator (participant)

Your next question comes from the line of Paul Fremont with Lattenberg Thalman. Please go ahead.

Paul Fremont (Managing Director)

Thank you very much. Good morning, Paul. Good morning. I guess my first question is, we've seen in the press about a Newsom plan for an $18 billion replenishment. Is that the entire plan that you're expecting out of the governor's office, or is that just a part of something larger in your view? Y

Patti Poppe (CEO)

eah, Paul. The devil's in the details. I certainly would not be relying on a press article to tell the whole story in this case. Let's let the process work. Like I said, sometimes the legislative process here in California can be a little bit of a bumpy ride, but we get to the right end in the end.

I have confidence that we'll do that here. As part of a holistic package, as we've said, what's really important to us is, number one, there's durability to the fund, affordability for customers, and attractiveness for investors, as well as a longer-term solution that really gets at the systemic environmental hazard that wildfire is causing here for the Californians that we serve.

Paul Fremont (Managing Director)

Right. There's obviously not a lot of detail, but is there anything that you can share in terms of how the portion allocated to the IOUs would be allocated?

Patti Poppe (CEO)

Yeah. We're really just not in a position to speak for the legislature on this. Those are decisions that they'll be making, and we'll be working to advocate for, obviously, proper cost allocation.

Paul Fremont (Managing Director)

Great. Thank you very much. That's all for me.

Patti Poppe (CEO)

Okay. Great. Thanks, Paul.

Operator (participant)

I'll now turn the call back over to Patti Poppe, CEO, for closing remarks. Please go ahead.

Patti Poppe (CEO)

Thank you so much for joining us today, everyone. We know it's been a little bit of a bumpy ride, and we are in it for the long haul, and we want you to know. I just want to remind you that we've looked at a range of scenarios and feel comfortable reaffirming our financial guidance through 2028 against this backdrop of a variety of outcomes. We look forward to keeping you updated as the legislative activity takes shape in the coming weeks. We're standing for California, we're standing for our customers, and we're standing for you. Thanks so much. Stay safe out there. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.