Morningstar | Recent Developments Support Our Bearish View on PG&E
We are reaffirming our $12.50 fair value estimate and no-moat and stable moat trend ratings for PG&E after several developments this week. Our valuation continues to reflect our estimate of PG&E's postbankruptcy equity value.First, the California wildfire commission recommended reforming the state's inverse condemnation doctrine that holds utilities strictly liable for all damages involving their equipment. We consider inverse reform a requirement to restore PG&E's credit profile and equity valuation. However, Gov. Gavin Newsom and top state legislators said they would not support reforms this year. We think this political response means reforms will take many years to make it through the legislature and the courts.
We also expect inverse reforms will not absolve PG&E of the $14 billion of pretax liabilities and costs we assume it will face from the 2017-18 wildfire liabilities. This is the key driver of our postbankruptcy valuation. Reforms ultimately could lead us to lower our cost of capital, leading to a slight increase in our fair value estimate, but we think reforms are too uncertain and distant to make any changes now.
Second, PG&E failed to file an exit plan within its exclusivity period ending May 29, another sign that this case won't resolve quickly or on PG&E's preferred terms. The court extended PG&E's exclusivity period to Sept. 26, but creditors already are proposing competing plans. Shareholders likely will be worse off if creditors' plans gain support before PG&E files its preferred plan.
Third, California Public Utilities Commission president Michael Picker announced on May 30 he will leave the five-person commission this summer. We considered Picker mostly constructive for utilities. Newsom will choose Picker's successor subject to Senate approval. We think this regulatory uncertainty and Newsom's control over the new pick are substantial negatives given PG&E's need to gain CPUC approval for any rate changes.
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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