PG&E: Fire, Death, Losses, and ETF Impact (PCG, XLU)

PG&E Corp. (NYSE: PCG), the owner of Pacific Gas & Electric, often has to deal with unpleasant situations as it is a utility in the troubled West.  There are some man-made fires which routinely knock out service, there are the natural kinds of fires, and sometimes there are even earthquakes which knock out the company’s lines.  While the news of a fire near San Francisco seems small to those not close by, PG&E has seen a monstrous drop in its shares and without any real knowledge of what the liabilities and charges will be.  This also hit the Utilities Select Sector SPDR (NYSE: XLU) as the key ETF for the utility sector.

One of the company’s natural gas mains ruptured and exploded in San Bruno on Thursday night.  So far, there have been reported four deaths and many injuries.  Many homes (38 per our last count seen) were destroyed.  The cause of the fire is unknown and the National Transportation Safety Board and the California Public Utilities Commission are both investigating.

We were told that PG&E bond yields had widened out marginally, although the real damage was done in the shares of common stock.  The unofficial closing price at the 4:00 PM EST closing bell was down 8.44% at $44.17 on more than 29.6 million shares versus an average of 2.65 million shares per day and versus a 52-week range of $34.95 to $48.34.  Utilities are supposed to be defensive stock investments for the most part.  Not today.

One of the key ETFs in the utility sector is the Utilities Select Sector SPDR (NYSE: XLU) that has about 4.8% weighting in PG&E.  Its shares closed unofficially down 0.7% at $31.40 on over 4 million shares, versus an average of 7.5 million shares and against a 52-week range of $25.76 to $32.08.

The information available on the PG&E site noted: “Our thoughts go out to everyone affected by the explosion and fire in San Bruno. The priority right now is to help make the area safe. We have crews on the scene and are working with emergency officials. Though a cause has yet to be determined, we know that a PG&E gas transmission line was ruptured. If it is ultimately determined that we were responsible for the cause of the incident, we will take accountability. Meanwhile, we are working with the Red Cross to provide emergency shelter for those in need.  Anyone in need of assistance or shelter can contact the Red Cross at 1-888-443-5722 (888-4-HELP-BAY).”

The press release noted that the main was a 30-inch steel gas transmission pipeline which has been isolated, gas flow has been stopped to the affected area, and that gas flow to the area gas distribution pipes has also been stopped.

After digging around filings, it looks as though PG&E has insurance for liabilities of up to $1 billion in damages related to fires.  Without knowing the cause and without knowing the full extent of the damage yet, determining whether that insurance will be used or even if it will act as coverage is not possible without any preliminary and/or final investigation data is released.

Total net income for 2009 was $1.22 billion, or $3.20 per share, by GAAP reporting.  The Utility served about 5.1 million electric distribution customers and about 4.3 million natural gas distribution customers at December 31, 2009. The Utility had $42.7 billion in assets at December 31, 2009 and generated revenues of $13.4 billion in the 12 months ended December 31, 2009.

The size of PG&E is $17.4 billion in market capitalization and the drop today made PG&E by far the worst performer of the utility index.  Morgan Stanley downgraded the shares to equal-weight from overweight on the uncertainty, although the research note obviously has no determination of cause nor of any real damages that the company will face.

Erin Brockovich probably won’t be defending PG&E in this matter.

JON C. OGG