Morningstar | PCG Updated Star Rating from 18 Apr 2019
We are reaffirming our $12.50 per share fair value estimate and no-moat and stable moat trend ratings for PG&E after reviewing new CEO Bill Johnson's compensation package. The heavy weighting on performance metrics, especially safety, and substantial option package is unique.The safety focus is no surprise. Safety metrics have been an increasingly important part of PG&E's executive compensation, and Johnson's plan makes safety by far the largest factor in his at-risk pay.
The options are more controversial. Assuming Johnson meets the safety goals, the options incentivize him to make decisions that boost the stock price, possibly at the expense of ratepayers, fire victims, creditors, and dividend seekers. The options with $40 and $50 per share strike prices are aggressive. We estimate PG&E would have to exit bankruptcy owing virtually nothing to fire victims and facing no fines or penalties for the stock to reach those levels. This seems unlikely.
We think Johnson's pay package--substantial upfront pay and long-term upside--is reasonable given PG&E's uncertain fate and need for an industry veteran with a solid performance record. Overall, we think Johnson's incentives align with current shareholders' interests. We expect the bankruptcy court and creditors to challenge the $3 million upfront payment.
Johnson's immediate challenge is creating goodwill among shareholders and politicians ahead of the May 21 annual meeting. If Johnson can't build widespread support and the vote is contentious, his tenure will be off to a challenging start. Activist shareholders, led by 3% holder Blue Mountain Capital, and notable politicians, including California Gov. Gavin Newsom, have opposed the company's 13 director nominees.
Each director must win a majority of shareholder votes totaling at least 25% of shares outstanding, a high threshold. Investors representing 10% of shares outstanding have publicly supported PG&E's nominees.
For more detail on our analysis of PG&E and other California utilities, see our report, "California Utilities: Gold Rush or Fool's Gold?" published Feb. 26.
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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