Hedge Funds Jump Into California Utilities, and Some Get Hurt

(Bloomberg) -- PG&E Corp., the California utility beset by potential costs tied to state wildfires, attracted investments from some of the nation’s best-known hedge funds just before its share price swooned.

Baupost Group, the Boston-based hedge fund run by Seth Klarman, added 14.5 million PG&E shares last quarter, according to the Form 13F the firm filed this week with the U.S. Securities and Exchange Commission. Hound Partners, Viking Global Investors and Appaloosa were also buyers. On a combined basis, the four firms owned 6.8 percent of California’s largest utility as of Sept. 30, up from 1.2 percent at the end of June.

Uncertainty over the utility’s potential liability from deadly wildfires has contributed to a 48 percent plunge in PG&E’s share price this month. The shares rallied as much as 40 percent this morning, after the head of the California Public Utilities Commission said Thursday that he can’t imagine allowing the state’s largest utility to go into bankruptcy as it faces billions of dollars in potential liability from deadly wildfires.

“Legislators do not want PG&E to go bankrupt,” Travis Miller, a utilities analyst at Morningstar Inc., said in a telephone interview Wednesday. “If you believe the market has overreacted, it could be a pretty exceptional value play.”

Fires affected PG&E’s stock last year too. The shares tumbled 13 percent on Dec. 21, 2017, when the company suspended its dividend due to uncertainty over its exposure to billions of dollars in damages from 2017 wildfires in Northern California wine country. But the outlook improved this August when state lawmakers approved a bill designed to help PG&E pay for damages tied to the fires and still remain solvent, Miller said.

As of this morning, the fourth-quarter sell-off had reduced the value of Baupost’s stake to about $404 million from $873 million at the end of September -- assuming the holding hasn’t changed.

Diana DeSocio, a Baupost spokeswoman, declined to comment. An Appaloosa official declined to comment, while Hound and Viking representatives didn’t immediately return calls placed this morning.

Hedge funds have been faring better with some of their other recent utility investments.

Sempra Climbs

Elliott Management, the New York-based hedge fund run by Paul Singer, acquired a 4.1 percent stake earlier this year in Sempra Energy as part of an activist campaign at the San Diego-based power company. Sempra is up about 7 percent this year, having suffered much less fallout from the California fires, in part because there has been less damage to its service territories, Miller said.

Stephen Spruiell, an Elliott spokesman, declined to comment.

California is one of the only states that applies the concept of inverse condemnation to utilities, meaning that they can be held strictly liable for any property damage if their equipment is found to have caused a fire. PG&E’s equipment is thought to have been involved in igniting or intensifying many of the wildfires in its service area last year, Miller said.

If PG&E is found responsible for this year’s fires, its liability could reach $15 billion, bringing the two-year total from wildfires to as much as $30 billion, Citigroup Inc. estimated. That exceeds the company’s current market value of about $12.4 billion.

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