PG&E is Still Not a Buy at Any Price (NYSE:PCG)

Investors got a bit of a surprise on November 7. Pacific Gas & Electric Company NYSE: PCG posted a “less bad” earnings report. The beleaguered public utility posted earnings-per-share (EPS) of $1.11 on revenue of $4.43 billion, exceeding analysts’ expectations for an EPS of 99 cents. The EPS was down from the $1.13 the utility posted in the same quarter last year. Over the last four quarters, the company has surpassed consensus EPS estimates four times.

The company remains in bankruptcy protection

If you haven’t been following PG&E, the utility filed bankruptcy protection in early 2019. The move was made to work through an estimated $30 billion in liabilities that the company is facing. The liabilities stem from a series of wildfires that occurred in 2017 and 2018, most notably the Camp Fire in Northern California in November of 2018.

PG&E needs an infrastructure makeover

The issue that PG&E faces is aging transmission lines. These outdated lines were cited as the cause of the Camp Fire and continue to be a drag on the company’s revenue. In the company’s earnings report they cited an anticipated $6.3 billion of losses in 2019 due to wildfires. The problem is such that the company began instituting mandatory rolling blackouts in Northern California in an effort to prevent further wildfires.

The state is looking to fundamentally change the company’s business model

PG&E has until June 30, 2020, to exit from bankruptcy protection. Right now, it’s unclear whether that is likely. California Governor Gavin Newsom and other Northern California mayors are not convinced. They are backing a plan that would nationalize the utility.

"It is my hope that the stakeholders in PG&E will put parochial interests aside and reach a negotiated resolution so that we can create this new company and forever put the old PG&E behind us,” said Newsom. “If the parties fail to reach an agreement quickly to begin this process of transformation, the state will not hesitate to step in and restructure the utility.”

Under their proposal, PG&E would become a customer-owned cooperative rather than a publicly traded utility. The thinking behind such a move would be that changing the company to a privately owned business will free it from any legal requirement to pay out dividends. It would also remove profit as the primary reason to be in existence.

Even a settlement could push the share price to zero

While it seems unlikely that the state will carry through with their threatened takeover, they have exerted enough influence to convince the judge overseeing the bankruptcy proceedings to allow alternative proposals to be presented. In particular, this is advancing the proposal from a group of bondholders led by billionaire Paul Singer’s Elliott Management Corp and Pacific Investment Management Co. The proposal has the backing of the wildfire victims and would set aside billions for individual fire claims.

According to Citi analyst Praful Mehta the plan has a 75% chance of succeeding. If it does, PGE’s stock price will go down to zero. “I don't think there is a credible plan for the state to step in right now, because that is an extremely complicated next step,” said Mehta, lead analyst for utilities and renewables at Citi. “But even if they can't step in, if they apply enough pressure here to get these two parties to agree to something, it might help get them to exit by June 2020.”

For its part, PG&E has presented a reorganization plan that caps individual victims’ claims at $8.4 billion. Under the proposed settlement, insurers or insurance claim holders would receive $11 billion. According to Mehta, under the PG&E plan, the stock would be worth between $20 and $22 per share.

To the end, U.S. Bankruptcy Judge Dennis Montali has recently ordered the principal parties into mediation at PG&E’s request.

It’s best to avoid this falling knife

A share price of $20 would be an over 200% increase from the current PG&E stock price. But is it worth the risk? There’s too much unknown for long-term investors to even consider getting involved with this stock. PG&E shares have lost about 70.9% since the beginning of the year versus the S&P 500's gain of 22.7%.

Prior to the release of their earnings report, the stock has had some recent daily moves of nearly 8%. This might make it worth the time of speculators and day traders, but there is way too much unknown about the future of the company and the stock to get involved with it right now.