Morningstar | Legislation Removes PG&E Bankruptcy Risk, but Shareholders Still Could Face Big Wildfire Bill
We are reaffirming our $53 fair value estimate and no-moat and stable moat trend ratings for PG&E after California legislators passed a last-minute bill that effectively protects California utilities from bankruptcy as a result of wildfire liabilities. The stock is approaching our fair value estimate after rallying 11% as the legislation gained support and ultimately passed in the final week of the 2018 state legislative session.Although Senate Bill 901 eliminates worst-case scenarios going forward, we still believe shareholders face significant liabilities related to the October 2017 wildfires. We continue to deduct $5 per share from our unaffected fair value estimate to account for a 50% probability that PG&E shareholders could face $10 billion of wildfire liabilities. We are not surprised to see the market add back $2.5 billion of value for PG&E between when the SB 901 draft emerged Aug. 28 and the market open after the bill passed on Aug. 31.
Most importantly, the bill requires regulators to conduct a stress test before denying wildfire cost recovery and allows utilities to securitize wildfire liabilities. In a best-case scenario, PG&E could shift all fire liabilities off its balance sheet if regulators determine PG&E acted prudently. We doubt regulators will approve full securitization, but any securitization preserves shareholder value.
The legislation also allows utilities to defer fire mitigation costs, a positive for shareholders. One negative is utilities will no longer be able to recover some compensation expense through customer rates. We already assume PG&E recovers only 70% of its overhead costs through rates, so this change has no material impact on our forecasts or fair value estimate.
We expect PG&E will keep the dividend suspended until after Cal Fire releases all of its reports on the October 2017 fires and regulators rule on rate recovery.
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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