What The California Wildfire Commission Report Means For PG&E

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 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%