Morningstar | PG&E Takes $10.5 Billion Charge for Camp Fire; 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 took a $10.5 billion pretax charge related to the 2018 Camp Fire and an additional $1 billion charge for a group of 2017 fires.PG&E's net pretax accounting charges for the 2017-18 wildfires now total $12.4 billion, including a $2.5 billion third-quarter charge for the 2017 fires, $2.2 billion of probable insurance recoveries, and other related costs. This is in line with the equity value dilution we incorporate into our fair value estimate. We think PG&E's bankruptcy filing on Jan. 29 anticipated these new charges. As a regulated utility, PG&E would have had to finance this charge to restore its equity balance in line with its regulatory allowed 52% equity structure. We saw no path for PG&E to do this as its stock bottomed near $6 per share.
PG&E's investigation and investigations by other state authorities increasingly point to one of PG&E's transmission lines as the cause of the 2018 Camp Fire, which resulted in 85 deaths and more than 18,800 destroyed structures. This could make PG&E liable for substantial fire-related losses based on California's inverse condemnation statute. Ultimately, through bankruptcy, we think PG&E will settle claims for about $0.60 per $1. We estimate this is roughly what is represented in PG&E's accounting charge.
Excluding charges, PG&E reported $4.00 per share of adjusted operating earnings for 2018, up from $3.68 per share in 2017. These results are slightly better than we expected, although not enough to affect our fair value estimate. We think PG&E's core business can grow 6% annually on a normalized basis if it 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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