We are cutting our fair value estimates for California utilities PG&E (PCG) and Edison International (EIX) to reflect possible liabilities related to state wildfires. However, we think the market has overreacted to the extent of potential liabilities, and the stocks appear undervalued as of midday Nov. 12. In the last two trading days, PG&E has lost $7.4 billion of market value, or 30%, and Edison has lost $4.7 billion of market value, or 21%, both exceeding our initial estimates of fire liabilities.
We cut our PG&E fair value estimate by $2 per share to $51 after incorporating $2.5 billion of probability-adjusted pretax liabilities related to the Camp Fire. We continue to include a $5 per share reduction related to potential liabilities from the 2017 wildfires, which burned about double the 113,000 acres the Camp Fire had burned as of midday Nov. 12. The 2017 wildfires resulted in 44 deaths and 8,900 structures destroyed compared with 29 deaths and 6,700 structures destroyed in the Camp Fire as of midday Nov. 12.
PG&E took a $2.5 billion pretax charge earlier this year for a series of 2017 fires that burned 132,100 acres, destroyed 2,200 structures, and killed 12 people. That charge could go higher once Cal Fire releases its report from the October 2017 Tubbs Fire, the largest and most deadly of the 2017 fire season.
We cut our Edison fair value estimate by $1 per share to $66 after incorporating $800 million of probability-adjusted pretax liabilities related to the smaller Woolsey and Hill fires, which had burned 90,000 acres and resulted in two deaths and 200 structures destroyed as of Nov. 12. Edison has no material historical fire liabilities.
The critical issue for investors is whether Senate Bill 901 will limit the utilities' third-party fire liabilities related to inverse condemnation, or strict liability standard. The law likely will limit the financial impact of the 2017 fires but does not specifically address future fire liabilities.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Travis Miller does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.