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Stock Analyst Update

PG&E Uncertainty Climbing as California Fire Burns

We are reassessing our fire liability valuation, uncertainty rating, and cost of capital assumption for the firm.

The historic destruction related to the Northern California Camp Fire and the potential for limited capital market access as PG&E's stock price falls has led us to reassess our fire liability valuation, our uncertainty rating, and our cost of capital assumption.

We are cutting our fair value estimate for PG&E to $30 per share from $51 and raising our uncertainty rating to Very High. Our decision to raise our cost of capital to 7.0% from 6.2% resulted in a $16 per share cut in our fair value estimate. We also tripled our probability-adjusted valuation for 2018 fire liabilities, resulting in an additional $5 per share cut in our fair value. We now include a $5 per share deduction for 2017 fire liabilities and an $8 per share deduction for 2018 fire liabilities.

PG&E's cost of capital is becoming a critical issue with the stock down 60% since Nov. 8 and liquidity concerns. A higher cost of capital will restrict the company's ability to invest in its system, including its gas business. Our new cost of capital assumption for PG&E is the highest cost of capital among all fully regulated U.S. utilities we cover.

We think public officials must step in to reassure the market so PG&E can fund routine investments. We don't think bankruptcy is an immediate threat, but the market's lost confidence is a key near-term concern. If policymakers can reassure investors, we think the stock will rebound to an equilibrium price near our fair value estimate. However, it is likely that PG&E's cost of capital will remain elevated for many years and it could trade at a substantial discount to peers.

The rising death toll and number of structures damaged since our last update led us to double our worst-case Camp Fire liability gross estimate to $10 billion. This is partially offset by the $1.4 billion of liability insurance the company reported. We also raised our probability estimate for PG&E's exposure to 2018 liabilities given Senate Bill 901 does not offer 2018 protections.

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