Pacific Gas & Electric (PCG) or PG&E shows why utilities are no longer a widow and orphan stocks.
PG&E (PCG) just emerged from a $59 billion Chapter 11 Bankruptcy and it already faces a lawsuit over another wildfire, GreenTechMedia reports. The suit arises from the October 2019 Kincade Fire, which burned 77,528 acres and destroyed 374 buildings.
The California Department of Forestry and Fire Protection alleges that a PG&E transmission line started the Kincade fire in Sonoma County, GreenTechMedia reports. Attorneys for property owners sued PG&E in July. The suit alleges that PG&E’s failure to maintain its power lines caused the fire.
Can PG&E Survive?
Survival could be impossible for Pacific Gas & Electric (NYSE: PCG). GreenTechMedia claims PG&E can only survive by reducing wildfire risk to zero.
To explain P&GE will have to prove all of its electric lines are clear of overhanging tree limbs and well-maintained, Stanford Professor Michael Wara claims. I cannot see how PG&E can achieve that goal.
I think zero-wildfire risk is impossible for PG&E. Frighteningly zero-wildfire risks is just one of four impossible goals GreenTechMedia’s Jeff St. John thinks PG&E needs to accomplish to survive. The other goals are:
First, P&GE will need to spend enormous amounts of money to decentralize its infrastructure to make its electric grid more reliable. Second, the utility will have to meet all the state of California’s clean energy requirements. Essentially, California mandates that PG&E stop burning fossil fuels to make electricity.
Finally, PG&E will have to keep rates low to please its millions of customers, who also vote. I cannot see how PG&E can achieve any of those goals without massive amounts of federal or state money.
Thus, PG&E’s only hope for survival in its current form is to pray that Congress passes and the President signs some form of the Green New Deal. Given the power of budget hawks such as US Speaker of the House Nancy Pelosi (D-California) and US Senator Mitch McConnell (R-Kentucky) on Capitol Hill, I think that goal is impossible.
Is PG&E Making Money?
Pacific Gas & Electric (PCG) is making some money. PG&E reported a quarterly operating income of $282 million on 30 June 2020.
That quarterly operating income fell from $655 million on 31 March 2020. However, PG&E reported a -$4.343 billion quarterly operating loss on 31 December 2020.
Notably, PG&E reported a quarterly gross profit of $3.64 billion on 30 June 2020. The quarterly gross profit grew from $3.477 billion on 31 March 2020 and fell from $3.935 billion on 31 December 2019.
Dramatically, PG&E reported a -$1.972 billion quarterly common net loss on 30 June 2020. PG&E reported a $371 million quarterly common net income on 31 March 2020; and a -$3.620 billion quarterly common net loss on 31 December 2019.
PG&E Experiences Some Growth
Oddly, PG&E is experiencing some revenue growth. Stockrow gave PG&E a 14.96% revenue growth rate for the quarter ending on 30 June 2020.
PG&E’s revenue growth rate rose from 7.35% for the 31 March 2020 quarter and fell from 16.02% for the 31 December 2019 quarter. Thus, PG&E is capable of impressive revenue growth.
PG&E (PCG) reported $4.533 billion in quarterly revenues on 30 June 2020. That number rose from $4.306 billion on 31 March 2020 and $4.743 billion on 31 December 2020.
How Much Cash Does PG&E Generate?
Pacific Gas & Electric (NYSE: PCG) can generate an enormous amount of cash. PG&E reported a $13.414 billion quarterly ending cash flow on 30 June 2020.
However, I think PG&E borrowed most of that money. To explain, PG&E reported a $13.514 billion quarterly financing cash flow on 30 June 2020. In contrast, PG&E reported a $1.967 billion quarterly ending cash flow on 31 March 2020 and a -$1.407 billion quarterly negative ending cash flow on 31 December 2019.
On the other hand, PG&E reported a $1.686 billion quarterly operating cash flow on 30 June 2020. That quarterly operating cash flow grew from $1.605 billion on 31 March 2020 and $749 million on 31 December 2019.
Notably, PG&E had $15.381 billion in cash and short-term investments on 30 June 2020. That number grew from $1.96 billion on 31 March 2020.
What Value Does PG&E Have?
Pacific Gas & Electric (PCG) reported $109.229 billion in assets on 30 June 2020. However, PG&E reported $105.428 billion in Total Liabilities, $45.795 billion in Total Current Liabilities, $34.92 billion in Long-Term Debt, and $59.633 billion in non-current Liabilities on 30 June 2020.
Frighteningly, PG&E’s Total Liabilities rose from $80.929 billion on 31 March 2020 and $79.808 billion on 31 December 2019. Moreover, PG&E’s long-term debts grew from $1.655 billion on 31 March 2020 to $34.92 billion on 30 June 2020.
Thus, PG&E is a company with a mountain of debt and liabilities that is facing impossible government mandates. Consequently, I consider PG&E a value trap.
Yes, PG&E is a Value Trap
To explain, a value trap is a money-losing turkey of a company that appears to be a good value investment.
Many people, however, will consider PG&E a value investment because it is cheap and cash rich. Mr. Market paid $10.76 for PG&E (PCG) on 9 October 2020. That price rose from $7.22 on 20 March 2020. P&GE began 2020 at $10.85 on 2 January 2020 and hit a high of $18.03 on 10 February 2020.
I think PG&E will never make money because of its debt load. Instead, I think PG&E will collapse after more fires.
Moreover, I think the only way for PG&E to survive and make money is to dump its electric business and become a gas company. I think PG&E could make money from natural gas but not from electricity.
However, I cannot picture any private company buying PG&E’s electric infrastructure. Instead, PG&E will need to give or sell that infrastructure to the state or convert P&GE’s electric grid into a customer-owned electric cooperative. I cannot tell if such a solution is politically viable, but I think it is unavoidable.
Good Alternatives to PG&E
I think there are some suitable alternatives to traditional utilities such as PG&E out there.
One utility alternative I like is the Invesco WilderHill Clean Energy ETF (PBW). The PBW is an exchange-traded fund (ETF) that invests 90% of its assets in the stocks on the WilderHill Clean Energy Index. In 2020, the PBW’s share value grew from $34.85 on 2 January to $70.57 on 9 October 2020. The PBW’s investments include Vivant Solar (VSLR), Tesla (TSLA), and Canadian Solar Inc. (TO: CSIQ).
Another excellent investment is the WilderHill Clean Energy Index (INDEXNYSEGIS: ECO). In 2020 the WilderHill Clean Index’s market summary grew from $72.14 on 2 January 2020 to $16.54 on 9 October 2020.
It appears Mr. Market is betting on clean energy and against traditional utilities. I think Mr. Market could be right in thinking Climate Change dooms traditional utilities such as PG&E (PCG) Investors need to avoid PG&E because I consider it a volatile value trap.
Originally published at https://marketmadhouse.com on October 9, 2020.