Bankruptcy or Bluff? PG&E Shareholders Have Upside

We are reaffirming our $30 fair value estimate for PG&E PCG after assessing the implications of a credit rating downgrade, management turnover, and statements from public officials on Jan. 8 and 9. We are also reaffirming our no-moat and very high uncertainty ratings.

PG&E management appears comfortable letting bankruptcy talk simmer, particularly after S&P cut PG&E's credit rating below investment grade on Jan. 8. We don't think this should bother shareholders. We think it could be an effective strategy that preserves sizable upside.

The company's near-term financial health remains strong. PG&E has robust interest coverage (6 times adjusted EBITDA/interest), $3 billion of liquidity, and no sizable debt maturities until 2023. Astute financing moves last year put it in a strong negotiating position.

We think the bankruptcy threat gives PG&E two options. A voluntary filing would allow a judge to decide the winners and losers. We consider this an expedited path to resolution. Shareholders could argue their case among many other stakeholders. If California wants PG&E to survive as a healthy investor-owned utility, we estimate shareholders could retain $10 billion-$15 billion of value, or $20-$30 per share.

Alternatively, PG&E could use a bluff-and-stall strategy. This has worked well for shareholders of other utilities and energy companies that have used this strategy. PG&E would keep the bankruptcy threat alive while it goes through an excruciatingly long legal, regulatory, and political process. We expect wildfire investigations, regulatory rulings, legislation, lawsuits, and insurance claims could drag on for a decade before PG&E paid out any cash. This would substantially reduce the present-value impact of any shareholder losses.

We continue to deduct $13 per share for our probability-adjusted estimate of 2017-18 wildfire liabilities and $16 for PG&E's higher cost of capital at current market prices.

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