California's Wildfire Commission recently submitted a report to the state's governor and senate that poses a "high level of uncertainty" for utility company PG&E Corporation (NYSE: PCG), according to Morgan Stanley.
The Wildfire Commission's report doesn't make clear the size and sources of a wildfire fund; the prospect of a repeal of inverse condemnation; or the treatment of future fire liabilities, Byrd said in a Friday note. (See his track record here.)
Nevertheless, there are several key takeaways from the report that could impact PG&E's future prospects, the analyst said.
First, PG&E could use net income securitization to fund its fire liabilities, Byrd said.
This would be favorable for shareholders, as it would effectively result in an equity issuance at a higher P/E multiple versus a share issuance, he said. The company should be able to raise a "considerable amount" of equity at an implied multiple of 14x versus the current 5x multiple, the analyst said.
On the other hand, FFO/debt metrics would see a negative impact of 250 basis points from a reduction in net income, Byrd said. The securitization debt in the denominator would add another 350-basis point impact, he said.
Regulatory officials are less uniform on the prospect of a large wildfire victims fund given the multiple complexities involved, according to Morgan Stanley; there could be a smaller "liquidity fund" that would serve as an alternative to the insurance fund and serve as a bridge loan to utilities.
PG&E shares were trading higher by 0.44% at $18.37 at the time of publication Friday.
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