Morningstar | PG&E hoping for legal, regulatory, and political help with wildfire issues.
Northern California wildfires, notably the ones in October 2017, appear to be another overhang for PG&E as it works through the regulatory, legal, and political ramifications. Investors should be prepared for ongoing policy risk and uncertainty similar to the six-year trudge through gas pipeline issues following the September 2010 San Bruno explosion.Public and regulatory scrutiny come with being the largest utility in California. We believe shareholders should be prepared to see PG&E in the headlines, both good and bad. On the positive side, PG&E will play a key role in implementing the state's aggressive energy modernization and environmental policies, resulting in investment opportunities that top its peers.The 2017 wildfire claims could top $10 billion based on insurance claims filed through mid-2018. This would be well above the $3 billion of net fines, rate credits, and unrecovered investments we estimated related to San Bruno and other pipeline issues. Wildfire liabilities from 2017 alone could total $13 per share of lost value based on our estimate of a worst-case scenario. Large wildfires in 2018 could present additional risk.PG&E suspended its dividend in late 2017, and we think it could remain suspended until at least late 2019 or until the company resolves the wildfire issues. This comes just one year after shareholders received their first dividend increase in six years, dating back to the San Bruno disaster.On a normalized basis, California has a mostly constructive regulatory framework that supports industry-leading core earnings growth. Putting aside wildfire impacts and equity dilution, we expect annual earnings growth can top 6% based on outcomes from its long-delayed gas transmission rate case and its 2017-19 general rate case.We expect all of its planned $6 billion of annual investment will be earnings- and value-accretive within the current regulatory framework. Beyond 2020, California's quest to modernize the grid, meet state energy policy goals, and address distributed generation offers a long runway of growth. Its 10.25% allowed return on equity, which is locked in through 2019, is among the highest in the country.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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