Morningstar | PG&E Far From Resolving Wildfire Issues, but Core Business Still Strong
We are reaffirming our $53 fair value estimate and no-moat and stable moat trend ratings for PG&E after the company reported $1.16 per share of adjusted operating earnings in the second quarter, up from $0.86 per share in the second quarter of 2017.We continue to believe PG&E represents a good risk/reward investment opportunity. We estimate the market assumes PG&E will have to pay out more than $10 billion related to the October 2017 wildfires. We continue to put a 50% probability on this worst-case outcome, resulting in a $5 per share reduction to our fair value estimate.
At the core business, PG&E continues to track our 6% normalized growth outlook based on $6 billion of annual investment during the next few years. However, that growth might slow if fire liabilities require PG&E to raise equity. Charges like the $2.2 billion PG&E took in the second quarter could require new equity if regulators won't suspend PG&E's capital structure requirement. We think Cal Fire's report on the large Tubbs fire could result in another accounting charge. Higher insurance costs also could be a drag on core growth if regulators limit recovery.
Several developments in the coming months could provide more wildfire clarity and could drive significant stock price moves, given the wide range of market expectations. We think California legislators have enough political momentum to pass wildfire-related legislation before the end of the session in August. However, we think the upside will be limited for utilities, given the tight timeline to address complicated issues like inverse condemnation, securitization, and disaster rate recovery.
The California Supreme Court could decide to review PG&E's inverse condemnation challenge in the 2015 Butte fire, setting up a ruling in 2019-20 that could be a precedent for the October 2017 wildfires.
We continue to believe PG&E will leave its dividend suspended at least into early 2019.
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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