Morningstar | Securitization Would Provide Relief For PG&E After Other Reforms Failed. See Updated Analyst Note from 21 Aug 2018
We are reaffirming our $53 fair value estimate and no-moat and stable moat trend ratings for PG&E as California legislators debate allowing PG&E to issue securitized debt to pay for what could be more than $10 billion of liabilities related to the October 2017 wildfires.We continue to believe PG&E offers a favorable risk/reward investment opportunity trading at an 18% discount to our fair value estimate as of Aug. 20. Securitization would be a big positive for PG&E shareholders and could lead us to raise our fair value estimate depending on how the bonds are structured. In a best-case scenario, the bonds would be securitized against customer rates. Full securitization could add as much as $5 per share to our fair value estimate.
The bonds also might include partial equity funding while preserving PG&E's investment-grade credit rating and current rate-setting capital structure. This likely would protect shareholders' downside but might not change our fair value estimate depending on the structure.
Securitization also could end up saving customers in the long run by preserving PG&E's equity value. Burdening PG&E with all fire liabilities likely would raise its costs to finance system investments and public policy initiatives. We forecast PG&E will spend $6 billion annually during the next three years, most of which has received regulatory approval.
The securitization debate moves to the forefront as the California legislators abandoned efforts to reform the state's inverse condemnation doctrine in the final week of the state legislative session.
We await Cal Fire's report on the Tubbs fire, which could be the most costly of the October 2017 fires. We think the market already is pricing in a high probability that Cal Fire's report will show PG&E's equipment was involved in the fire, opening PG&E to inverse condemnation's strict liability standard.
We continue to believe PG&E will leave its dividend suspended at least into early 2019.
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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