Pacific Gas and Electric Company (PG&E) (PCG) is on everyone’s radar Thursday, with shares flying higher by more than 70%. The reason for the surge is the news that California investigation cleared the company from liability related to the 2017 Tubbs wildfire. The California regulators said the Tubbs Fire, which killed 22 people and destroyed nearly 37,000 acres mainly in Napa and Sonoma Counties, was caused by a private electrical system near a residential structure.
This is clearly good news for PG&E investors, but it follows some really bad news. Last week, PG&E announced its intention to file for bankruptcy. While the company acknowledged that there is ample liquidity to continue operations in the near term, as well as alternative forms of relatively dilutive or expensive financing available, the board has determined the quicker and potentially less damaging course of action for stakeholders would be a Chapter 11 Bankruptcy filing.
J.P. Morgan analyst Christopher Turnure commented, “We see the company’s arguments in favor of court-overseen restructuring as carefully considered and the intent to file for bankruptcy credible. While PCG is not obligated to file following expiration of the notice period, alternative outcomes appear unlikely absent near-term state or CPUC-led intervention in an extraordinary and definitive manner.”
RBC’s Shelby Tucker added, “We are still somewhat surprised by PG&E’s intent to file for voluntary bankruptcy given that CAL FIRE has yet to make a determination on the Tubbs and Camp fires. The announcement arguably shifts the political timeline to the left, particularly after the company signaled up to $30 billion in wildfire-related liabilities. The elevated uncertainty should also put further pressure on the California Public Utilities Commission to finalize stress test parameters and/or motivate accelerated discussions on possible structural changes. The resignation of CEO Geisha Williams was a first step to create some level of goodwill with legislative and political bodies. Relatedly, we are not holding our breath for a resolution on Inverse Condemnation in the near-term. The application of Inverse on California utilities, regardless of negligence has become a perennial debate with no imminent resolution on the horizon. PG&E’s bankruptcy considerations could accelerate discussions, and potentially challenge the application of Inverse in federal court. Nonetheless, we see no easy fix, amplified by the magnitude and complexity of claims.”
In an era of investor protection, it’s understandable that analysts may side with caution when it comes to PG&E. Overall, out of 13 analysts polled by TipRanks in the last 3 months, 1 rates PCG stock a Buy, 10 maintain Hold, while 2 issue Sell. When considering if this stock is overvalued or undervalued, it is worthy of note that analyst expectations indicate nearly 50% return potential, with the 12-month average price target standing at $12.00. (See PCG’s price targets and analyst ratings on TipRanks)