Shareholder Value Could Still Exist at PG&E

We are reaffirming our $12.50 fair value estimate for  PG&E (PCG) after the company filed for Chapter 11 bankruptcy on Jan. 29, as we expected. We are also reaffirming our no-moat and very high uncertainty ratings.

Apart from the bankruptcy filing, shareholders received what we consider positive news when the California Department of Insurance announced that $8.4 billion of claims have been reported related to the 2018 Northern California wildfires, including the Camp Fire. This is up from $7 billion in the department's December update. 

If claims stay near this level and subsequent reports absolve PG&E of blame for starting the 2018 fires, our fair value estimate could climb well above $20 per share. We continue to assume a 50% probability that PG&E faces $20 billion of claims, fines, and penalties related to the 2018 fires.

We believe bankruptcy was the only way PG&E could have avoided liquidity challenges in the second half of 2019 based on its operating plan and investment needs. PG&E's $5.5 billion of debtor-in-possession financing should cover liquidity needs through 2020, in line with the company's projection.

We think assertions that PG&E's solvency was sufficient to avoid bankruptcy were misguided. PG&E had no path toward meeting its $6 billion investment budget while maintaining its regulatory capital structure with the stock trading at one third of book value as of Jan. 28. Even a modest fourth-quarter accounting charge probably would have required a sizable equity raise.

PG&E's solvency going into bankruptcy contrasts with its severe liquidity needs going into its 2001 bankruptcy. Thus, we think the 2001 bankruptcy is a poor guide for investors. Shareholders' postbankruptcy value will depend on the level of discounted settlements PG&E can reach with claimants; legal and regulatory fines and penalties; political reforms; and costs regulators allow PG&E to pass along to customers.

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