PG&E Corporation PCG opened down 25 percent Monday after CNBC reported the company could face a minimum of $30 billion in liabilities related to California wildfires in 2017 and 2018, citing unnamed sources. The report comes after a Reuters story over the weekend suggested the utility is considering a bankruptcy filing and will potentially be taking a major financial charge in Q4.
Investors certainly seem to be taking the reports seriously, but Height Securities analyst Clayton Allen said in a Monday note that the timing of the report suggests it could be at least in part politically motivated.
“The suggestion, attributed to anonymous sources, comes just days before the California legislature reconvenes today, and may pressure legislators to more hastily address whether to allow PCG to pass through costs associated with the devastating 2018 wildfires to customers,” Allen said.
Without some form of legislative action from the state of California, PG&E will likely soon get its credit downgraded to junk status and be forced into bankruptcy, the analyst said.
Preparing For The Worst
PG&E is already exploring the sale of its gas assets to cover liability costs related to the wildfires, according to Height.
In June, California found PG&E equipment was responsible for starting dozens of fires throughout the state in 2017. The state is now investigating whether PG&E equipment was responsible for starting 2018’s Camp Fire, the most destructive wildfire in California history.
A potential $30 billion in liability for PG&E would far outpace its market cap of $12.6 billion.
“We argue bankruptcy may be a substantive solution for several of PCG’s woes, and should be considered a credible risk by shareholders,” Allen said.
UBS analyst Daniel Ford said Monday there is too much uncertainty surrounding PG&E stock to buy the dip. UBS has a Neutral rating and new $29 price target for PG&E.
“Our base valuation of $29 up from $26 now assumes PCG is not liable for Tubbs and reflects a higher $15.1-billion net liability ($11.3 billion prior) for 2017 and 2018 due to the Camp fire, but a lower cost of funding (7.5 percent versus 9 percent WACC),” Ford said.
Even if PG&E avoids bankruptcy, the stock could also still have more than 50 percent of additional downside to the $9 range in a worst-case liability scenario similar to the one CNBC reported, the analyst said.
Following Monday morning’s sell-off, PG&E shares are now down 61.1 percent in the past three months.
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