Utility company PG&E (NYSE:PCG) is seeking to tap $7 billion from California’s Energy Department Loan Programs Office to control the risk of wildfires in the state, a Wall Street Journal report said. California is prone to wildfires in the summer that leave behind massive damage. PG&E’s power lines have sparked over 20 major wildfires in the last couple of years. By tapping the federal funds, the company plans to bury 10,000 miles of PCG’s power lines in areas that are more prone to wildfires. Plus, some money could be used for upgrading the existing lines and strengthening the electricity grid in California, which is pushing for greater electric vehicle (EV) adoption.
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What is the Federal Loans Program?
The federal loan program aims to encourage utility companies to shift towards cleaner energy operations. The Loan Programs Office has roughly $400 billion in federal funds, a part of which could be given to companies seeking to upgrade their energy infrastructure projects.
PG&E, earlier known as Pacific Gas & Electric Corporation, emerged from a complex bankruptcy turnaround in 2020. The company does not carry an investment-grade credit rating and thus finds it difficult to raise money from banks and other Wall Street firms. Even if it does find a lender, the current high-interest rate environment means it will be shelling out huge sums in interest payments. In contrast, federal funds are loaned based on long-term Treasury Yield rates. Currently, the benchmark 10-year T-Bill carries a 3.7% interest rate, implying cost savings of up to $20 million annually for every $1 billion in federal loans availed.
PCG’s power lines serve an area of roughly 70,000 square miles. The company has said that it aims to bury 2,100 miles between 2023 and 2026. Its application for federal funds remains under review, and there is no guarantee that it will receive the funding, as companies are required to meet certain criteria. PCG has planned to spend $50 billion in capital expenditures between 2022 and 2026 and will increase investments going forward. Should the federal funds be approved, it would help PG&E make major changes to its power lines and share some of its benefits with customers.
Is PCG a Buy, Hold, or Sell?
On TipRanks, PCG has a Moderate Buy consensus rating based on four Buys and three Hold ratings. The average PG&E price target of $18.64 implies 9.2% upside potential from current levels. Meanwhile, PCG stock has gained 8.9% so far this year.
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