Stock Analyst Update

Bankruptcy Fears Lead to Sharp Sell-Off in PG&E Shares

Travis Miller

We are reaffirming our $30 per share fair value estimate for  PG&E (PCG) after a fresh round of bankruptcy fears led to a sharp sell-off in shares. PG&E traded near $19 intraday, down more than 20% but still above the lows in mid-November, when bankruptcy fears emerged. We are reaffirming our no-moat and very high uncertainty ratings.

We think PG&E's Jan. 4 news release was meant to grab the attention of new California legislators and new Gov. Gavin Newsom as they went into session on Jan. 7. PG&E suggested it is reviewing its financial options, which we think could include bankruptcy.

PG&E faces fire-related liabilities that could top $20 billion, according to media estimates. PG&E has taken $2.5 billion of charges for the 2017 fires and could take substantially more charges in the fourth quarter for the 2017 or 2018 fires. We continue to deduct $13 per share for our probability-adjusted estimate of 2017-18 wildfire liabilities totaling $20 billion. We also deduct $16 for PG&E's higher cost of capital at current market prices.

A bankruptcy threat or large accounting charge likely would force California regulators to address PG&E's allowed capital structure and customer rates within months rather than years. Public officials, including California Public Utilities Commission President Michael Picker, have said the state is best off with healthy investor-owned utilities. California Assemblyman Chris Holden has said he will introduce legislation this month that could avert bankruptcy.

We think the most likely scenario is regulators and legislators create a framework that requires shareholders to fund a significant share of fire liabilities while requiring PG&E's customers to fund the remaining portion. We estimate that the market is pricing in as much as $25 billion of liabilities.

The company also said it is considering changes to its board of directors. This already happens every year, since all directors must be nominated and elected annually.

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Travis Miller does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.