Morningstar | Initial Wildfire Insurance Claims Support Our Fair Value Estimates for PG&E and Edison
We are reaffirming our $30 per share fair value estimate for PG&E and our $66 per share fair value estimate for Edison International after the California Department of Insurance reported $7 billion of insurance claims have been filed for the Camp Fire in PG&E's service territory and $2 billion for the Woolsey/Hill fires in portions of Edison's service territory. We are reaffirming our no-moat, stable moat trend rating for PG&E and our narrow moat, stable moat trend rating for Edison.We expect both claims numbers to climb. We continue to assume a 75% probability that PG&E shareholders will be responsible for up to $10 billion of damages from the Camp Fire, resulting in an $8 per share deduction to our fair value estimate net probable insurance recoveries. We include an additional $5 per share deduction based on our 50% probability that PG&E could face as much as $10 billion of shareholder losses from the 2017 fires.
Our lower 2017 worst-case probability is based on Senate Bill 901, which could mitigate shareholders' losses based on the so-called customer threshold test. However, SB 901 does not cover the 2018 fires, leaving PG&E potentially exposed to Camp Fire liabilities. A PG&E report earlier this week suggested its system failures could have contributed to the Camp Fire ignition.
Public officials have given what we consider mild support for the investor-owned utilities. We expect proposed legislation in early 2019 to offer SB 901-like protections for the 2018 fires, but we expect tepid support pending negligence investigations. Others support municipalization, which could leave PG&E shareholders with little--if any--residual value. Absent financial certainty, we expect PG&E to continue trading at a substantial discount to peers and a high cost of capital.
We deduct $2 per share from our Edison fair value estimate based on our probability-adjusted estimate of its fire-related liabilities, net Edison's $1 billion fire insurance coverage.
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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