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Why Shares of PG&E Are Surging Today

By Lou Whiteman - Nov 12, 2019 at 1:31PM

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The utility is reportedly sweetening its compensation offer for fire victims.

What happened

Shares of PG&E ( PCG 1.53% ) traded up more than 13% on Tuesday afternoon, and were up nearly 20% earlier in the day, following a report that the bankrupt utility is increasing the amount of compensation it's offering wildfire victims. If true the increase would improve the odds that PG&E will retain control of its reorganization, which in turn would make it more likely that current equity holders won't be wiped out in the process.

So what

PG&E has been operating under bankruptcy protection since January, attempting to work out a deal to manage an estimated $30 billion in liabilities stemming from the 2018 Camp fire in Northern California. Equity holders are often wiped out in a bankruptcy reorganization, but shares of PG&E have continued to trade on the belief that the company would preserve some value for shareholders as part of its emergence plan.

Utility power transmission lines

Image source: Getty Images.

Unfortunately, the utility has had a lot go wrong in the months since its filing, including a new round of fires, and complaints from creditors and other stakeholders that they weren't being adequately compensated. Last month the court allowed creditors to file competing reorganization plans, potentially costing PG&E control of how it would emerge from protection.

A group of creditors led by Pacific Investment Management and Elliott Management have a competing plan that would all but wipe out current stockholders, handing control over to creditors. That group is offering wildfire victims about $13.5 billion in total compensation, more than the $11 billion PG&E was set to offer in its reorganization.

PG&E is now prepared to offer $13.5 billion in compensation as well, according to Bloomberg. If so, the company would be well on its way to matching the rival plan, and therefore stand a better chance of retaining control and preserving some equity value.

Now what

A sweetened offer from PG&E would indeed be a positive development for stockholders, but caveats remain. The report said the negotiations are still ongoing, and there is not yet agreement on how the payout will be structured and how much of it will be in the form of stock. The utility remains the target of criticism from California lawmakers, including some who want to turn PG&E into a customer-owned cooperative.

Until this mess is resolved, and California comes up with a long-term plan to manage wildfire risk, this is not a utility stock to be considered by long-term, buy-and-hold investors. It's still too soon to say what will ultimately become of PG&E.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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