Morningstar | Wildfire Risks Remain Top of Mind for PG&E, but Growth Opportunities Keep Developing
We are reaffirming our $53 fair value estimate and no-moat and stable moat trend ratings for PG&E after the company reported $1.13 per share of adjusted operating earnings in the third quarter, up from $1.12 per share in the third quarter of 2017.Wildfire risks remain the key investment consideration and primary difference between our fair value estimate and PG&E's $48 per share stock price as of early November. PG&E has taken $2.3 billion year-to-date charges related to the October 2017 Northern California wildfires. We estimate the market assumes PG&E will have to pay out more than $10 billion pretax. We continue to put a 50% probability on this worst-case outcome, resulting in a $5 per share reduction to our fair value estimate.
The fair value deduction in part represents our estimate for PG&E's new equity needs to fund fire liabilities while maintaining its regulatory allowed capital structure. This equity need and the impact on our fair value estimate could change substantially based on the implementation of Senate Bill 901, which could allow securitization of past wildfire liabilities, a cap on shareholder losses, and disaster relief funds to cover future fire liabilities. Regulators likely will decide the timing and amounts for these rate-making tools as part of the customer harm threshold proceedings next year.
PG&E's core business continues to track our 6% normalized growth outlook based on $6 billion of annual investment during the next few years. PG&E has substantial growth investment opportunities in distribution upgrades and disaster mitigation work following the new more-aggressive renewable energy standards in Senate Bill 100 and the implementation of SB 901.
We continue to watch legal developments related to California's inverse condemnation statute and Cal Fire's report on the large Tubbs fire in October 2017. Timing for both is uncertain.
We continue to believe PG&E will leave its dividend suspended at least into late 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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