Morningstar | PG&E Absolved of Tubbs Fire Blame, But Financial Woes Still Substantial. See Updated Analyst Note from 24 Jan 2019
We are raising our fair value estimate to $12.50 per share from $11 after the California Department of Forestry and Fire Protection, or Cal Fire, found PG&E did not violate state laws with respect to the cause of the 2017 Tubbs fire. We are reaffirming our no-moat and very high uncertainty ratings.We still expect PG&E to file for bankruptcy as soon as Jan. 29. Although PG&E's long-term liabilities now appear smaller, its near-term need for cost-effective capital remains pressing. Despite a 75% jump in the stock on Jan. 24, we think it remains cost-prohibitive for PG&E to raise equity for its planned investments. Our estimates show PG&E needs its committed $5.5 billion of debtor-in-possession financing to continue operating as planned while stakeholders resolve all fire issues.
Our fair value increase is due to a reduction in our probability-adjusted estimate of PG&E's 2017 wildfire liabilities following the Tubbs report. We now assume a 75% probability that PG&E will be responsible for $5 billion of claims, penalties, and fines related to fires that Cal Fire investigators allege involve state law violations. PG&E took a $2.5 billion pretax charge in the third quarter related to these fires. We believe subsequent investigations and legal rulings will lead to additional charges.
We previously assumed a 50% probability that PG&E would be responsible for at least $10 billion of claims, penalties, and fines related to the 2017 fires. Cal Fire alleges PG&E violated state laws in 17 of the 21 identified 2017 Northern California wildfires but not Tubbs, which was by far the largest and most deadly.
We are reaffirming our assumption that PG&E faces a 50% probability of $20 billion of claims, penalties, and fines related to the 2018 Camp Fire, the most destructive and deadly in state history. We also still believe PG&E's postbankruptcy equity value could exceed $20 per share if it avoids significant penalties and settles fire claims at $0.35 per $1.
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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