Jim Cramer on PG&E (PCG): Wildfire Liability Puts Growth Plans Under Pressure

On September 2, while discussing how California lawmakers failed to advance wildfire-liability reform, Mad Money host Jim Cramer mentioned PG&E Corporation (NYSE: PCG ) and said:

Boy, it's been a tough week if you own any California-based electric utilities. Last weekend, a deal to reform the way wildfire liabilities are treated fell through, sending stocks like PG&E and Edison International down roughly 20% over the past 3 days. Right now, if a regulated utility in California causes a wildfire with its power lines, it can be held liable and on the hook for major financial penalties, even if they have insurance policies in place. The law lets the insurance company sue the utilities to recover the money they pay out. Utilities have been trying to cap that amount they pay. And it looks like they've been able to get this through the legislature. But then, I don't know, at the last minute, the deal fell apart. Now, it's unclear what's going to happen. This morning, PG&E, the gas and electric utility in Northern California, said they're exploring strategic alternatives. They also announced they'll be cutting back on their capital spending next year, not safety, capital spending.

Boy, it's been a tough week if you own any California-based electric utilities. Last weekend, a deal to reform the way wildfire liabilities are treated fell through, sending stocks like PG&E and Edison International down roughly 20% over the past 3 days. Right now, if a regulated utility in California causes a wildfire with its power lines, it can be held liable and on the hook for major financial penalties, even if they have insurance policies in place.

The law lets the insurance company sue the utilities to recover the money they pay out. Utilities have been trying to cap that amount they pay. And it looks like they've been able to get this through the legislature. But then, I don't know, at the last minute, the deal fell apart. Now, it's unclear what's going to happen. This morning, PG&E, the gas and electric utility in Northern California, said they're exploring strategic alternatives. They also announced they'll be cutting back on their capital spending next year, not safety, capital spending.

The selloff highlights a problem for the company, which is that wildfire liability is increasing financial risk just as the utility needs to invest heavily in its grid.

Under California's inverse-condemnation rules, utilities can be held financially responsible for wildfire damage caused by their equipment even when they are not found negligent. PG&E Corporation's (NYSE:PCG) exposure is significant given the wildfire liabilities that played a central role in its 2019 bankruptcy. The latest legislative ended without the comprehensive wildfire-liability protections utilities had sought. The company has responded by deferring about $2 billion of planned 2027 investment, reducing its capital plan to $11.4 billion from $13.4 billion and launching a strategic review of its regulatory, financial, operational and organizational structure.

The deferral is expected to reduce debt-financing needs by $2 billion while preserving critical safety programs and compliance requirements. CEO Patti Poppe said PG&E "cannot simply wait" for the policy framework to change. She said restoring investment-grade credit is an important goal of the review and that the company is looking at how it is structured and financed.

Bear Case: Wildfire Risk Could Erode Rate-Base Growth

The strongest bearish argument is that wildfire risk could make PG&E Corporation's (NYSE:PCG) infrastructure opportunity less valuable to shareholders. It can grow earnings by investing in its regulated network and expanding its rate base, but those returns depend on access to affordable capital. Persistent wildfire uncertainty can raise borrowing costs and the return demanded by equity investors, reducing the economics of new investment.