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What The California Wildfire Commission Report Means For PG&E

Jayson Derrick

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 Analyst

Stephen Byrd maintained an Equal-Weight rating on PG&E with an unchanged $17.50 price target.

The Thesis

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.

Price Action

PG&E shares were trading higher by 0.44% at $18.37 at the time of publication Friday. 

Related Links:

Wells Fargo Still Cautious On California Utilities

Citi Upgrades PG&E, Raises Price Target By 200%

Latest Ratings for PCG

Date Firm Action From To
Feb 2019 Upgrades Sell Hold
Feb 2019 Upgrades Neutral Buy
Jan 2019 Upgrades Peer Perform Outperform

View More Analyst Ratings for PCG
View the Latest Analyst Ratings

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