Morningstar | PG&E Shareholders Must Choose Sides in Looming Board Room Fight
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 10 new directors, plans to hire industry veteran Bill Johnson as CEO, and 14 director nominees for the May 21 shareholder meeting.Although the market has responded positively, we continue to believe the market underestimates the political, regulatory, and financial liabilities PG&E faces. We believe PG&E must gain support from many stakeholders to maximize post-bankruptcy shareholder value, and we think these leadership plans fall short.
It appears PG&E has been unable to build consensus even among shareholders, setting up a potential contentious vote at the annual meeting. PG&E's alignment with investors holding 10% of shares outstanding excludes Blue Mountain Capital, which owns positions representing about 3% of shares outstanding and has proposed its own slate of 13 directors. Directors must receive a majority of shareholder votes totaling at least 25% of shares outstanding.
Some California politicians also have expressed concerns about PG&E's new leadership. This is important because PG&E needs substantial political support to achieve the legislative reforms we think will be necessary for PG&E to exit bankruptcy with a healthy credit profile and equity valuation.
Gov. Gavin Newsom was among the first to deride PG&E's selections, characterizing the group as hedge fund financiers and executives with scant utility safety records and business experience in California. We think this could erode support for Johnson and as many as half of PG&E's nominees. We also think politicians are unlikely to support PG&E's three legacy directors, including chairman Richard Kelly.
We think Blue Mountain's slate has a better chance of gaining stakeholder support. The group includes no current directors and is heavy on experience with turnaround situations, renewable energy, and California financial ties.
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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