PG&E Drops Another 25% After $3B Wildfire Drawdown

PG&E Corporation PCG stock is in free-fall, dropping as much as 30 percent Wednesday after the company said it experienced an “electric incident” prior to the beginning of the Camp Fire in California and told investors its insurance would not be able to cover its liability if it's deemed responsible for the fire.

‘Significant Liability’

In a new SEC filing Tuesday, PG&E said its subsidiary Pacific Gas & Electric Company has drawn down $3 billion from its credit line in preparation for potential liability for the California wildfire.

“While the cause of the Camp Fire is still under investigation, if the Utility’s equipment is determined to be the cause, the Utility could be subject to significant liability in excess of insurance coverage,” PG&E said in the filing.

PG&E stock is now down 49 percent in the past week as it's looking increasingly likely the company will be held liable for the Camp Fire, one of three major fires currently blazing in California.

The total cost of the the three wildfires is expected to exceed $19 billion.

Wall Street Weighs In

Analysts are already commenting on the implications of the $3 billion drawdown.

Citi analyst Praful Mehta said the state of California will likely step in to protect its utility companies with legislative action if necessary, although what that means for investors is unclear at this point.

“While we do think Sacramento will need to either apply the stress test to 2018 fires or apply SB901 to 2018 fires, the exact timing of when Sacramento acts is unclear at this time,” Mehta wrote.

Bank of America analyst Julien Dumoulin-Smith said the $3 billion drawdown is alarming, but its implications are still unclear at this time.

“We had a chance to catch up with the company, noting that this isn’t an indication of pre-filing for bankruptcy as they have $800mn of short-term debt coming due over the next three months as well as historical debt maturing in excess of $1bn,” Dumoulin-Smith wrote.

Long Road Ahead

Residents of Paradise, California are already suing PG&E for damages caused by the Camp Fire, and Height Capital Markets said the lawsuit will be the first of many for the utility company. However, it may take years for investors to get total clarity on the situation.

“Looking ahead, we expect that additional claims will come throughout early 2019, and settlement on the entire group of claims could take until 2020,” Height wrote.

In the meantime, buying PG&E stock on the dip or determining an accurate valuation for the stock is little more more than a guessing game.

Citi has a Neutral rating and $48 price target for PG&E stock.

Bank of America has a Buy rating and $63 target.

Related Links:

Everything We Know About The California Fires

PG&E Receives Multiple Upgrades Following New California Wildfire Legislation