Morningstar | California Regulators Say PG&E Safe for Now, but Fire Liabilities Still Loom Large
A late-afternoon statement from California Public Utilities Commission President Michael Picker on Nov. 15 gave PG&E the brief vote of confidence that the market needed to stop the stock's rapid downward spiral. But we think Picker stopped far short of offering any long-term relief for investors. We are reaffirming our $30 per share fair value estimate, no-moat rating, and very high uncertainty rating.Picker's statement that regulators are committed to investor-owned utilities operating in the state offers no assurance that the commission will absolve PG&E--or any other California utility--of the crippling wildfire liabilities it might face now or in the future. We continue to include a $13 per share deduction for our probability-adjusted estimate of 2017 and 2018 wildfire liabilities. We also incorporate a $16 per share deduction related to the higher cost of capital PG&E faces as it tries to raise equity at prices 50% lower than one week ago.
Picker suggested PG&E's road to financial stability now will go through the California Legislature and Senate Bill 901, which passed this fall. We don't think this offers investors much comfort. We consider SB 901 more of a bandage than a cast. The legislation's stress-test concept reduces bankruptcy risk but doesn't eliminate substantial equity value impairment. We expect politicians will be hesitant to pass any new legislation or amendments that appear to be a utility bailout.
We also think investors should be concerned that Picker chose to highlight the investigation into PG&E's safety culture. We expected the commission to expand this review eventually, but we think it's an ominous sign that Picker chose to highlight it in the utilities commission's first public statement. We think PG&E's cost of capital will remain elevated for many years and will trade at a substantial discount to peers until California's wildfire liabilities and obstructive public policies are resolved.
PG&E is a holding company that conducts its business through Pacific Gas and Electric Company (Utility), a public utility engaged in the sale and delivery of electricity and natural gas to customers. The Utility generates electricity and provides electric transmission and distribution services throughout its service territory in northern and central California to residential, commercial, industrial, and agricultural customers. The Utility provides natural gas transportation services to small commercial and residential customers and to industrial, commercial, and natural gas-fired electric generation facilities that are connected to the Utility's gas system in its service territory.
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