PG&E: Valuation Discount Unwarrated Under New Management

Ian Clark of Dichotomy Capital presented his investment thesis on Pacific Gas & Electric (US: PCG) at Best Ideas 2022.

Thesis summary:

Pacific Gas & Electric (PG&E) trades at a steep discount to other utilities but has better growth characteristics with firmer capex requirements. The company has the advantage of being a decoupled utility.

EPS should compound in the low double-digits for at least the next five years due to a robust grid-hardening effort combined with massive renewable energy demand from California.

There are many reasons for the valuation discount. To name a few: wildfires, bankruptcy memories, no dividend, etc. However, these problems were largely due to a management team that failed to understand and appreciate a rapidly changing utility environment. Post-bankruptcy a new management team was brought in, and the focus has changed dramatically.

The company has a clearer framework for wildfire liabilities and the ability to contain them thanks to enhanced data management and proper investment in their rate base transmission and distribution assets. Should PG&E be successful in reducing its wildfire exposure, the draconian scenarios priced into the stock should go away, and the shares should re-rate to historical utility multiples.

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About the instructor:

Ian Clark is the Managing Member of Dichotomy Capital, a power focused investment manager that looks for opportunistic returns in the public and private markets. Ian leads the public security selection process for Dichotomy Partners, a long/short hedge fund that primarily invests in utilities, power companies, and the power industry daisy chain.

He is also the CEO of Dichotomy Power LLC, an entity that owns and operates renewable energy assets that produce more than 47 GWh/ yr of power and has a dedicated retail energy arm. He is a regular contributor to State level energy policy and is active in numerous energy trade groups.

Prior to founding Dichotomy, Ian was an analyst for a NY-based hedge fund where he led research on private power investments and analysis of publicly traded independent power producers.

He received his M.S. in Chemistry from the University of Oregon.

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