Stock Analyst Update

PG&E Uncertainty Climbing as California Fire Burns

Travis Miller

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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