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Why Shares of PG&E Lost Nearly Half Their Value in August

Lou Whiteman, The Motley Fool

What happened

Shares of PG&E (NYSE: PCG) lost 42.4% in August, according to data provided by S&P Global Market Intelligence, following a series of developments that suggest the California utility might have more trouble sailing through bankruptcy protection than previously hoped. This is a volatile situation likely to produce many more highs and lows before it is eventually resolved.

So what

PG&E filed for bankruptcy protection in late January as part of a plan to deal with upwards of $30 billion in wildfire liabilities stemming from a blaze last fall. The so-called Camp Fire in Northern California, which resulted in 85 deaths and massive property damage, was sparked by a PG&E power line.

Power transmission lines stretching into the horizon.

Image source: Getty Images.

The company has been attempting to reorganize and work out a plan involving California's legislature that would create a fund to help manage future liabilities. But that effort suffered a blow mid-month after former U.S. Attorney General Mark Filip, a court-appointed monitor, filed a report that found PG&E has failed to identify and trim thousands of trees near power lines and has been deficient in record keeping and inspector training.

The suggestion of negligence is likely to make it harder for PG&E to win over skeptical lawmakers who want to make sure the utility is held accountable before agreeing to provide any new funds that could ease future costs. It could also make it more difficult for PG&E to get its reorganization plan through the courts.

Further uncertainty was created days later, when reports surfaced that PG&E would face a jury trial over a separate, 2017 file. For now, PG&E has retained its sole right to formulate a bankruptcy exit plan, but at least two groups of creditors have gathered billions in financial commitments to formulate competing proposals. The longer the PG&E bankruptcy goes on and the more issues the utility is forced to confront, the greater the risk that PG&E's plans will derail and the value of the company's equity impacted.

Now what

Investing in utility stocks comes with a unique set of opportunities and challenges even in the best of times. That's particularly true in the case of PG&E.

It's worth noting that despite PG&E's troubles, there is real value in its assets, and it is in the best interest of California lawmakers to ensure a steady and stable power utility for the state's citizens. That's the bull case for PG&E, that no matter how bad things look for the company, it is too important to the state to be allowed to fail.

That may prove to be true, but at this point, buying into PG&E is speculating and not investing. There is certainly an opportunity for PG&E shares to be worth significantly more in two years than they are now, but there is going to be a series of twists, turns, and potential pitfalls between now and then. Investors should tread carefully.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com