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Investing.com -- In the recent fourth quarter letter to shareholders, Dan Loeb’s hedge fund, Third Point, shared an update on its holding of PG&E (NYSE:PCG) Corporation. Loeb expressed deep concern over the recent fire events in Southern California, which have affected several team members and their families who reside in Los Angeles.
Loeb clarified that while PG&E does not operate in the region affected by the fires, there has been media speculation regarding a potential connection between the Eaton (NYSE:ETN) fire and transmission equipment owned by SoCal Edison (SCE), another investor-owned utility under Edison International (NYSE:EIX). SCE, however, has publicly denied this possibility, and the investigation is still ongoing. Loeb emphasized that no conclusions can be made at this stage about the fire’s origin.
Loeb explained the potential implications if SCE’s equipment is found to be related to the Eaton fire. The California legal standard of "inverse condemnation" could expose SCE to property damage liabilities. However, following PG&E’s bankruptcy in 2019, California enacted a bill, AB1054, which offers protection to the state’s investor-owned utilities, including Edison, PG&E, and Sempra, from such liabilities, provided they adhere to rigorous safety standards.
These standards include having a comprehensive wildfire mitigation plan approved annually by the government and a commitment to spend billions on grid hardening. For instance, PG&E has committed to spending $18 billion on wildfire mitigation from 2023 to 2025. In return, AB1054 offers several protections, including a legal prudency standard that entitles the utility to cost recovery via multiple channels in the event of a catastrophic fire and a $21 billion insurance fund to cover incurred liabilities.
Loeb noted that SCE, having an active safety certificate, should benefit from the protections under AB 1054, similar to PG&E in the event of a future fire. He also pointed out that regulator-approved cost recovery is a typical procedure for utilities in areas prone to severe climate events, acknowledging that it is not feasible to eliminate all risk from overhead grid infrastructure.
Loeb drew attention to the fact that PG&E is currently trading slightly below 10x 2026 earnings, compared to regulated utility peers trading above 15x. Despite having no direct financial liabilities from the events in Los Angeles, PG&E is trading at roughly the same multiple as Edison. Loeb believes investors are overly discounting the financial and legal protections provided by AB 1054. He expects more clarity from the state in the coming weeks and months.
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