Shares of PG&E Corp. plunged more than 13% by midafternoon on Dec. 21, after the company decided to suspend its common stock dividend, citing potential liabilities related to the destructive wildfires in Northern California last October. Several analysts also downgraded or reassessed ratings for PG&E in light of the decision, which they characterized as being essentially forced on the company due to wildfire liability policies in the state.
On Dec. 20, the boards of directors of PG&E and its utility Pacific Gas and Electric Co. suspended their common and preferred stock dividends, determining it the best option for the long-term interests of the companies, customers and shareholders.
PG&E, along with Edison International, is facing potential regulatory repercussions due to California's policy of inverse condemnation, under which regulators may hold utilities liable for fire damages if their equipment caused damage, regardless of negligence. The California Department of Insurance has estimated that the total property losses from the October wildfires are at least $9.4 billion.
In November, California regulators denied San Diego Gas & Electric Co.'s request to recover $379 million in 2007 wildfire litigation costs, saying the utility did not reasonably manage and operate its facilities prior to the October 2007 Witch, Guejito and Rice wildfires.
The move by PG&E's board surprised some analysts. RBC Capital Markets downgraded PG&E to "sector perform" from "outperform" and lowered the price target to $50 from $66. "This unexpected decision suggests greater risk than we had assumed surrounding regulatory treatment of the October 2017 Northern California wildfires," RBC analyst Shelby Tucker wrote. "The liability uncertainty might have prompted the dividend cut decision, but it is really the lack of support by the commission in the SDG&E case three weeks ago that is forcing the timing of the decision. Utilities are not insurance companies."
Evercore ISI lowered its price target for PG&E to $55 from $61. "The stock price reaction to the fire — and this drastic dividend action taken by [PG&E] — is an indictment of the legal doctrine of inverse condemnation and the [California Public Utilities Commission's] abdication of its responsibility under the law to apply a no fault standard of recovery, as they recently did in a SDG&E rate decision," analysts said. Evercore noted that cutting the dividend should preserve $275 million in cash per quarter for PG&E and $1.1 billion annually that it could use for future claims. The preferred dividend for Pacific Gas and Electric generates $14 million annually.
PG&E's Dec. 20 closing share price of $51.12, according to Evercore, reflects a discount of up to $14.9 billion to wildfire exposure, after already falling approximately 26% since the Northern California wildfires began to really draw attention to the financial risk Oct. 12. As PG&E's stock trades lower, in the range of $46.50 per share, that price discounts as much as $19.3 billion in wildfire exposure, Evercore analysts wrote. By comparison, PG&E's cumulative financial exposure to the San Bruno fatal pipeline explosion in 2010 ended up being roughly $4.4 billion, or approximately $2.99 billion after taxes, Evercore added.
Wells Fargo Securities LLC described PG&E's decision to suspend dividends as "not overly surprising," considering the wildfire-related risks faced by the company. Wells Fargo analysts wrote that they view the decision as "a prudent move by the Board to conserve capital and could (should?) serve the purpose of sending yet another message to key California policymakers (regulators/legislators) that the current application of the inverse condemnation law is putting the state's utilities at severe financial risk."
J.P.Morgan analyst Christopher Turnure also characterized the board's decision as an "aggressive and proactive" measure by PG&E that likely signals the beginning of "a protracted legal and regulatory effort of the state’s utilities against [inverse condemnation]."