Fire Raises Questions for Courts, PG&E Shareholders

We are cutting our PG&E PCG fair value estimate to $11 from $13 after raising our ongoing operating costs to reflect the likelihood that major fires and power outages like Northern California has experienced the last two weeks will continue. We are reaffirming our very high uncertainty and no-moat ratings.

We continue to think PG&E's valuation should reflect the competing bankruptcy exit plans. We now estimate PG&E's plan values the stock between $11 and $20 per share after our cost adjustment. A competing plan leaves current shareholders with virtually no value. We assume the final exit plan reflects a settlement that leaves current shareholders with about 20% ownership. At $4 per share, we estimate the market is pricing in an 8% ownership stake.

Even if PG&E ends up at fault for starting the Kincade Fire, we don't think the fire has become large enough or destructive enough to have a substantial valuation impact. Furthermore, state legislation this year created an insurance fund that PG&E might be able to tap to cover fire liabilities in 2019-beyond as long as it exits bankruptcy by June 30, 2020, as scheduled.

At this point, the Kincade Fire appears similar to the 2015 Butte fire, which burned 71,000 acres, destroyed 921 structures, and killed two people. The Kincade Fire had burned 66,000 acres and destroyed 96 structures with no fatalities through early Monday, according to news reports. The Butte Fire resulted in $1.1 billion of third-party claims and had no material shareholder value impact after accounting for insurance recoveries.

The 2018 Camp Fire, which effectively put PG&E into bankruptcy with some $15 billion of liabilities, burned 153,000 acres, destroyed nearly 19,000 structures, and killed 86 people.

Our new, higher operating cost estimate is based on the $200 million of unrecovered clean-up costs the company booked for the 2017 and 2018 wildfires as well as higher legal costs going forward.

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