Morningstar | PG&E Leadership Changes Represent Critical Step to Avoiding Shareholder Conflict
We are reaffirming our $12.50 per share fair value estimate and no-moat and stable moat trend ratings for PG&E after the company announced more leadership changes.We've long said PG&E must build consensus among many stakeholders--most importantly shareholders and politicians--to maximize post-bankruptcy equity value. PG&E's leadership changes earlier this month fell short, receiving rebukes from some large shareholders and politicians, notably California Governor Gavin Newsom.
We think PG&E's changes announced April 22 are a big step toward building consensus. Former CMS Energy and PacifiCorp CEO Fred Buckman will join the board, chairman Richard Kelly will resign, and former National Transportation Safety Board chairman Christopher Hart will join the leadership team as a safety advisor.
PG&E's new board now has support from shareholders representing about 13% of shares outstanding, likely enough to ensure a smooth board confirmation at its annual meeting. Each director must win a majority of shareholder votes totaling at least 25% of shares outstanding. We expect politicians will appreciate the addition of leaders with California ties and safety expertise.
On April 22, PG&E also requested a 16% allowed return on equity in its annual cost of capital filing. California peer Edison International recently requested a 17% base allowed ROE for its interstate transmission. These are well above our expectations. Average awarded ROE for investor-owned utilities haven't topped 13% in at least 30 years, based on quarterly data from the Edison Electric Institute.
The increase from 10.25% now would add about $1.2 billion to customer rates, raise our 2020 core earnings estimate almost 40%, and raise our fair value estimate to $14 per share. We think regulators will be reluctant to approve a base rate change until it resolves fire-related rate issues. We continue to assume a 10.25% allowed ROE in 2020 and a 10.5% normalized post-bankruptcy allowed ROE.
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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