As Bad As It Gets? PG&E Cuts Dividend, Tumbles 16% -- Barron's Blog
12:50 pm ET December 21, 2017 (Dow Jones) Print
By Andrew Bary
A sharp drop today in shares of PG&E, the big California electric utility, could present a buying opportunity after the company surprised investors by suspending its quarterly dividend. The company did so because of the potential legal liability for October wildfires in Northern California that has resulted in insurance claims for property losses of $9.4 billion.
Shares of PG&E ( PCG) are down $8.17 to $42.95, or 16%, following the announcement of the dividend suspension that begins in the current quarter. It had been paying a quarterly dividend of 53 cents a share.
The stock is down 38% since Oct. 11, the day before the fires. That has cut more than $13 billion from the company's market value. "We continue to believe that, at its current price, PG&E stock capitalizes a worst-case scenario with respect to PG&E's liability for property damages, and presumed inability to recover these costs from ratepayers," wrote analyst Hugh Wynne of Sector & Sovereign Research of Connecticut in a client note this morning. "Less adverse outcomes therefore offer material upside," he wrote.
By his calculation, PG&E stock now discounts around $17 billion of pre-tax, pre-insurance losses. The total insurance claims, by contrast, are $9.4 billion through November. There could be an additional $1 billion in claims from public entities.
"The implication is that the market expects no recovery of these property damages by PG&E from ratepayers, and for PG&E to incur a further $6.3 billion of pre-tax costs due to legal costs, fines imposed by the California Public Utility Commission, personal injury claims, consequential damages or punitive damages," Wynne wrote. He has an Outperform rating on the stock.
The shares now trade for just 12 times projected 2017 earnings, a sharp discount to the sector, which commands about 20 times earnings. PG&E could be liable for damages caused by the fires under a legal doctrine called inverse condemnation.
This is how the company explained it in a press release late Wednesday announcing the dividend suspension:
No causes have yet been identified for any of the unprecedented wildfires, which continue to be the subject of ongoing investigations. However, California is one of the only states in the country in which courts have applied inverse condemnation to events caused by utility equipment. This means that if a utility's equipment is found to have been a substantial cause of the damage in an event such as a wildfire -- even if the utility has followed established inspection and safety rules -- the utility may still be liable for property damages and attorneys' fees associated with that event.
"After extensive consideration and in light of the uncertainty associated with the causes and potential liabilities associated with these wildfires as well as state policy uncertainties, the PG&E boards determined that suspending the common and preferred stock dividends is prudent with respect to cash conservation and is in the best long-term interests of the companies, our customers and our shareholders," said PG&E Corporation Chair of the Board Richard C. Kelly. "We fully recognize the importance of dividends and intend to revisit the issue as we get more clarity."
The company said it planned to work with the state to address the negative "investment environment" caused by state law on inverse condemnation.
Shares of another California utility, Edison International ( EIX), are down $4.63, or 7%, today to $63.67 and have fallen 20% since Southern California wildfires broke out earlier this month amid concerns about its legal liability under inverse condemnation. Edison shares hit a new 52-week low today and did those of PG&E. The Utilities Select Sector SPDR ETF ( XLU) has slumped fallen 1.1% to $52.40.
More at Barron's Stocks to Watch blog, http://www.barrons.com/stocks-to-watch
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