Morgan Stanley Updates Outlook For PG&E After Mixed Wildfire Developments

After a wild and unpredictable 2018, PG&E Corporation PCG are bracing for what could be another volatile year in 2019. After recent developments related to the California wildfires, one Wall Street analyst said PG&E could face up to $6.9 billion in new penalties related to its role in the fires.

The Analyst

Morgan Stanley analyst Stephen Byrd reiterated his Equal-Weight rating and $31 price target for PG&E stock.

The Thesis

There have been several mixed developments for PG&E in recent weeks, Byrd said in a new note.

First, SB901 legislation passed in California orders the California Public Utilities Commission to use a stress test to determine the potential limit of liability for California utilities before penalties potentially harm state residents. Byrd said clarification in the next couple of months related to the details of the stress test to be applied to the 2017 and 2018 wildfires could be a positive catalyst for the stock.

One negative development was the CPUC Scoping Memo released Dec. 21 that identified “a deeper and more systemic problem” at PG&E other than simply bad luck. The commentary suggested “current corporate governance, structure and operations” could be an issue, meaning a potential significant shakeup could be in the cards.

One of the most damning developments is a CPUC Safety & Enforcement Division report released Dec. 27 that found PG&E allegedly falsified “tens of thousands” of records related to its Damage Prevention Program. Given the volume of potential violations and the maximum potential penalties per violation, Byrd estimates PG&E could face up to $6.9 billion in fines.

Despite the bad news, Byrd said the most significant recent legal development for PG&E is that it appears the Camp Fire wasn't caused by negligent maintenance of PG&E equipment.

The recent trading action in PG&E stock is likely overly pessimistic.

“While we appreciate the drivers of continued PCG stock weakness...we view the numerous recent developments involving PCG as mixed, with some positive elements, rather than entirely negative as the recent stock move would suggest,” Byrd wrote in the note.

Price Action

PG&E's stock traded around $23.85 per share Wednesday morning and is down 48 percent in the past three months.

Related Links:

Good News From California Public Utility Commission Sends PG&E Stock Skyrocketing

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