Morningstar | PG&E Earnings Grow, but Costs Weigh Heavily; Stock Still Overvalued
We are reaffirming our $12.50 fair value estimate and no-moat and stable moat trend ratings for PG&E after the company reported $1.04 per share of adjusted operating earnings in the first quarter. Our valuation continues to reflect our estimate of PG&E's postbankruptcy equity value.In its first quarter operating in bankruptcy, PG&E took no incremental charges for 2017-18 wildfire liabilities. We expect the next round of potential charges could come in the third quarter as regulatory, legal, and legislative developments offer insights into actual cash liabilities. Our fair value estimate incorporates write-offs in line with the company's cumulative $12.4 billion pretax liability write-offs, net insurance proceeds.
CFO Jason Wells recently appeared to lay the terms for a bankruptcy exit plan, implying that PG&E needed to have a better estimate of total claims exposure and the state had to implement any potential wildfire-related legislation. We think both of these efforts could take well into 2020. PG&E's offer to set up a fund for fire victims doesn't change our view on potential equity dilution.
We do expect PG&E to continue taking charges for wildfire and other costs that exceed authorized levels. Those totaled $410 million, or $0.79 per share, in the first quarter. Management estimates those costs could total $1.35 billion-$1.84 billion pretax, or about $1.90-$2.57 per share after tax. We expect PG&E will not be allowed retroactive recovery such that shareholders will bear all of these costs, as our fair value estimate reflects.
Core earnings were up from $0.91 per share in the first quarter of 2018 and are on track to meet our full-year operating earnings estimate. We think PG&E's core business can grow 6% annually on a normalized basis if the company continues with more than $6 billion of annual investment during the next few years. Growth opportunities include distribution upgrades and state-mandated disaster mitigation work.
For more detail on our analysis of California utilities, see our report "California Utilities: Gold Rush or Fool's Gold?"
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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