A $21 billion hedge fund has doubled down on PG&E since the California wildfires - here's why

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A $21 billion hedge fund has doubled down on PG&E since the California wildfires - here's why

camp fire destruction

Noah Berger/AP

Firefighter Jose Corona sprays water as flames consume from the Camp Fire consume a home in Magalia, Calif., on Friday, Nov. 9, 2018.

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  • BlueMountain Capital Management, which manages $21 billion, told investors in a recent letter obtained by Business Insider that it increased its stake in utility company Pacific Gas & Electric, despite a November filing from the company warning of liabilities "in excess of insurance coverage" from the deadly Camp Fire in California.

  • BlueMountain believes the market overreacted to the company's filing and writes in its letter that estimated insured losses and private litigation claims against the company from both the Camp Fire and a 2017 fire are "overstated."

BlueMountain Capital Management has doubled down on its investment into spiraling California utility company Pacific Gas & Electric, as the $21 billion hedge fund manager believes the market has overreacted to the impact of the deadly Camp Fire.

In a December letter to investors obtained by Business Insider, BlueMountain wrote that the firm increased its stake in PG&E by 88% to approximately 11 million shares over the last two weeks. The publicly traded utility company's stock price has fallen by as much as 60% since the Camp Fire began. It closed Tuesday trading at $26.06 a share.

While the manager believes liabilities will exceed the utility company's remaining insurance for this year, BlueMountain told investors that the current estimates of liabilities from the Camp Fire and 2017's Tubbs Fire in Napa have been "overstated." The market, the letter stated, also has not considered the possibility that an investigation into the cause of the 2017 fire will clear PG&E's name.

"The market assumes too high a probability that PG&E caused the Tubbs Fire, overestimates the face value of 2018 Camp Fire liabilities, and does not incorporate the several ways that the face amount of liabilities may be reduced," the letter said. The manager told investors that it had hired PA Consulting, a London-based consulting firm that specializes in the defense, energy and utilities industries, among others, to "locally investigate" the cause of the Tubbs Fire, and "their report affirmed our assessment" that PG&E did not cause the fire.

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The letter includes a chart that shows that BlueMountain predicts insured losses for the two fires to be $11.7 billion total, while sell-side analysts' estimates average out to more than $19 billion. BlueMountain also said the likelihood of back-to-back years of fires of Camp and Tubbs' magnitude "was approximately 1 in 150."

The manager's target price for the stock is $59.10, while analysts' average target is $40.20, the letter stated.

The Camp Fire was the deadliest in California history, killing at least 85, according to the Butte County Sheriff Office. The Tubbs Fire killed 22 people when it tore through California's Napa wine region last October.

PG&E's stock was hit hard after it disclosed in a regulatory filing in mid-November that Camp Fire liabilities may exceed the company's insurance coverage, and BlueMountain's letter makes clear it saw that as an opportunity to buy.

The firm has hedged its bet on PG&E with a short of State Street Global Advisors Utilities Select Sector SPDR ETF, which tracks an index of utility providers, BlueMountain said in its letter.

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A BlueMountain spokesman confirmed the authenticity of the letter but didn't comment further.

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