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.
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.
Liability Setback Hits Capital Plans
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.
The decision to defer $2 billion of investment shows how wildfire-related financial pressure can spill over into PG&E's capital plans. The company said some housing and renewable-generation connections, large-load projects and technology upgrades will be delayed, while its safety and wildfire-mitigation programs remain funded. The company will also re-evaluate its 2028–2030 capital investment and rate-base outlooks as part of the review.
That creates a risk to the growth model: higher financing costs can constrain investment, while lower investment can slow future rate-base expansion. The failed legislation removes a near-term route toward resolving that pressure. Management's decision to examine the company's structure adds another layer to the thesis. Poppe said PG&E's holding-company structure may prevent investors from fully seeing the value of its businesses, and that "everything is on the table." The review is expected to take 12 to 18 months.
Institutional Positioning Remains Stable
Hedge-fund ownership was unchanged through the second quarter. Insider Monkey, which tracks more than 1,000 elite hedge funds, reported 80 hedge fund holders of PG&E in Q2, unchanged from 80 in Q1. Of those hedge funds, AQR Capital Management was the top hedge fund shareholder in the quarter with approximately 86.3 million shares. As for the short interest, it stood at roughly 1.3%-1.6% of the float, which suggests the stock is not a crowded short trade.
The strategic review gives PG&E Corporation (NYSE:PCG) a chance to address its financing constraints and determine how much investment it can support under the current wildfire-liability framework. Restoring investment-grade credit would help, but investors will also be watching whether the company can maintain its planned grid investment without putting further pressure on its balance sheet.
While we acknowledge the potential of PCG as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock .
READ NEXT: Salesforce (CRM) Stock Surges as Jim Cramer Says AI Fears Were Overstated and Jim Cramer Notes Abercrombie & Fitch (ANF) is a Buy on a Pullback After Earnings Surge .
Disclosure: None. Follow Insider Monkey on Google News .
