Seeking Alpha

Two Big Tests For PG&E Shareholders

About: PG&E Corporation (PCG), Includes: PCG.PB
by: Vlae Kershner

The worst fire danger of the year is forecast this week for Northern California.

If the utility survives that, there's still a trial to worry about.

If those two challenges are met, the stock should rise substantially.

It's cross-your-fingers time in Northern California as fire season reaches its peak.

Warm temperatures, low humidity and wind gusts up to 45 mph are forecast this week, similar to the conditions exactly two years ago, when winds blew tree branches into power lines and started fires that killed 44 persons. The hot gusts from the north and east are often called Diablo winds in Northern California, similar to Southern California's more famous Santa Anas.

The weather will be a test of whether PG&E's expanded power cutoff program and other measures like tree-cutting can prevent a repetition of the disasters of the last two years. The utility on Tuesday said it planned to turn off the juice for 800,000 customer accounts in Northern and Central California on Wednesday.

The 15-day forecast for Sacramento shows only a minor chance of rain next week. Last year's devastating Camp Fire started November 8. The winter rains that ended fire season began November 20.

Everyone--including stockholders in the bankrupt utility--will breathe a loud sigh of relief when the rains come.

Decision on Tubbs Fire

After that, the most critical part of PG&E's bankruptcy process will occur starting January 9 in San Francisco's Superior Court. This is a state court, separate from the federal court that oversees the bankruptcy.

The trial will focus on whether PG&E was at fault in the Tubbs Fire, by far the most damaging of the 2017 fires and second most destructive in California history. According to the San Francisco Chronicle:

San Francisco Superior Court Judge Teri Jackson said jurors should be in place by Jan. 9, two days after the trial start date she set at an earlier hearing. The trial will be split into phases, first focusing on whether PG&E is responsible for the 2017 Santa Rosa-area wildfire and subsequently transitioning into the harm claimed by specific victims, followed by consideration of any punitive damages.''

To see how important the trial is, we only have to look at the stock chart:

Chart Data by YCharts

The January crash came after PG&E gave notice it planned to file for bankruptcy. The bounce off the low came after the state's fire agency, Cal FIRE, surprisingly ruled on January 24 the Tubbs Fire started on private land due to badly maintained privately owned electrical equipment.

However, fire victims disputed that, pointing to a video showing an arc flash on nearby PG&E-owned Pole 773 about 20 minutes before the fire started, likely due to blown fuses.

In August, PG&E stock plunged 25% after U.S. Bankruptcy Judge Dennis Montali ruled a state trial would be needed to see if PG&E was responsible. The Tubbs Fire started near Calistoga in Napa County and rapidly spread, driven by winds. It jumped Highway 101 and burned a large part of Santa Rosa, destroying 5,636 structures and killing 22 people.

Plaintiffs attorneys say damages could be up to $18 billion. That's about as much as the $17.9 billion that PG&E's reorganization plan is proposing to pay for all of the 2017 and 2018 wildfires put together.

San Francisco is of course a progressive city, and juries have given high awards--for example, $289 million in a case against Monsanto after a gardener who used weed killer got cancer. However, the city's jury pools tend to be well-educated, and jurors have rejected claims like this one.

California law allows judges to reduce awards, as was done in the Monsanto case by about two-thirds.

Timing of a Ruling

The two-phase nature of the trial means the result could be known anytime from late January (if PG&E is held not responsible) to early March (if the jury has to calculate specific and punitive damages). Much of the evidence was destroyed in the fire, so the jury may have a difficult task.

Just for argument, let's say the jury comes back with an $18 billion damage award, reduced to $15 billion by the judge. The claim would then get in line with the others and be sorted out in in yet another court, U.S. District Court, which is responsible for tallying the amount due fire victims.

Since a $15 billion liability works out to $28.35 per PCG share, one can see how the stock value could be greatly eroded.

PG&E's plan calls for only an $8.4 billion trust for fire victims other than insurance companies and public entities, who would get $12 billion under recent settlements. Attorneys for fire victims told the bankruptcy judge Monday they see $13.5 billion in claims. So the total--excluding Tubbs--is a maximum of around $25 billion.

The victims prefer a competing reorganization plan launched by bondholders. Montali has thus far not been sympathetic, but promised to issue a ruling on whether competing plans can go forward "very quickly."

PG&E says it has financing commitments for $34.45 billion. Some of that has to be used to cut down trees and harden the system against future fires, but there's still some wiggle room if the Tubbs Fire isn't PG&E's responsibility.

Morgan Stanley estimated the equity value at more than at more than $20 a share if the bankruptcy concludes with no surprises. Morningstar gave a fair value estimate of $13, with the base case that shareholders will end up with less than 30% of the company after new equity is issued, including some form of cash-plus-stock settlement with fire victims.

This is where the Tubbs Fire trial becomes key--if PG&E's liability becomes too high, substantially more dilution will be necessary.

Conclusion: I'm fairly optimistic that the fire prevention efforts will be successful (fingers crossed), but don't have any firm opinion on the result of the Tubbs Fire trial. I don't believe equity will be wiped out entirely and thus expect the preferred issues to be restored to paying status with arrears. As in July, I remain bullish on the preferred stock (particularly series B) and neutral on the common.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.