What happened

Shares of PG&E (PCG 0.79%) climbed more than 16% on Monday after the bankrupt California utility announced a $13.5 billion settlement with victims of California wildfires. The deal, while expected, is good news for shareholders because it makes it more likely the company's equity-friendly reorganization plan will survive a creditor challenge.

So what

PG&E entered bankruptcy nearly a year ago to manage an estimated $30 billion in liabilities stemming from 2017 and 2018 wildfires. Equity holders are typically wiped out in a bankruptcy reorganization, but shares of PG&E have continued to trade because the company has said it intends to preserve some value for shareholders as part of its reorganization plan.

A utility transmission pole.

Image source: Getty Images.

That assumption has come under pressure in recent months following complaints from wildfire victims and creditors that they were not being adequately compensated. In October the court allowed creditors to file competing reorganization plans, a move that threatened to cost PG&E control of how it exits bankruptcy.

PG&E announced late Friday a settlement with the bankruptcy committee representing tort claimants and with firms representing individual claimants that would pay victims $13.5 billion. The settlement is subject to conditions including court approval, but in reaching this agreement, PG&E gains a powerful ally to help it guide its plan of reorganization through the courts and fend off challengers.

"With all major wildfire claims now on a path to be resolved and the total amount of wildfire liabilities determined, PG&E will now amend and finalize its plan, which will satisfy all wildfire claims," PG&E said in its statement. "The company remains on track to obtain regulatory approval and bankruptcy court confirmation of its plan in advance of the June 30, 2020, statutory deadline."

Now what

The settlement is certainly good news for holders of PG&E shares, but the stock is still off more than 40% in the last six months. The company's bankruptcy saga is far from over, and more volatility is possible as the court process plays out in the months to come.

For long-term investors looking to buy a utility stock on the cheap, PG&E shares remain untouchable. In addition to the bankruptcy risk, the company also faces an uncertain future as California lawmakers continue to debate how to reduce the risk of future wildfires and compensate future victims. Until there is a long-term plan in place to deal with those issues, stay away from this stock.