Stock Analyst Update

Shareholder Value Could Still Exist at PG&E

Travis Miller

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.

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.