A Multibillion-Dollar Question Brings Wall Street to Sacramento

(Bloomberg) -- In January, a team of Citigroup Inc. analysts left the comforts of their New York high-rise for a pilgrimage to California.

The group of 30, including some of the bank’s investor clients, scarfed down a box lunch in Citi’s San Francisco office and then hit the road in a chartered bus, bound for the dusty cowtown-turned California capital Sacramento. Their mission: Gain an edge on what’s become a multibillion-dollar bet against utility giants PG&E Corp. and Edison International -- each facing potentially massive liabilities from devastating wildfires their power equipment may have ignited.

A Multibillion-Dollar Question Brings Wall Street to Sacramento

Citigroup wasn’t alone. Wall Street types including Mizuho Financial Group Inc. and Columbia Threadneedle Investments have been descending upon Sacramento in droves to gain insight for clients and themselves. On a recent day, legislative staffers at the capital pointed to business cards piling up on their desks from investors and analysts.

To understand why they’re making the trip, consider this: In a single day, PG&E saw $3.5 billion of market capitalization vanish as California began probing its equipment as the cause of the deadly Wine Country blazes in October. It has since lost $6.3 billion more. Edison has seen more than $4 billion in value wiped out by similar investigations. PG&E’s stock hasn’t been this volatile since the financial crisis, data compiled by Bloomberg show.

“For an issue that is so hugely important,” said Praful Mehta, the Citigroup analyst who led its recent California trip, “it’s critical to do on-the-ground diligence.”

The relationships they’re building in the capital are about to pay dividends. PG&E has been leading the fight in Sacramento to kill a law known as “inverse condemnation.” It holds utilities liable for wildfire damages if their equipment is found to be the cause -- even if they weren’t negligent. California Governor Jerry Brown and legislators formed a committee last week to weigh changes in how the state regulates utilities when it comes to wildfires. The panel’s widely expected to tackle this law as part of that broader mandate.

$17 Billion

If California ultimately holds PG&E responsible for the deadly blazes that broke out across Napa Valley in October, the company could face as much as $17 billion in liabilities, based on JPMorgan Chase & Co. estimates.

Paul Fremont, a New York-based utility analyst for Mizuho Securities USA, was among those who traveled to California to glean more insight from legislators on what the future holds for PG&E and Edison. He spent three days in meetings and distributed a note to clients after his trip about the ways California’s legislature could end up helping utilities mitigate their exposure.

“Our motivation was to just better understand what to expect in California in the future,” Fremont said. “To get a full picture, you need to basically be on top of this issue and you need to understand the various points of view.”

Three Hours

Mehta and his team spent about three hours jumping from one meeting to the next in Sacramento. “You can have a good conversation with them, which is tougher over the phone,” he said of the visit. “You get to see body language and their reaction to different questions.”

California Assemblymember Autumn Burke, a Democrat from Marina del Rey, said she was among the legislators who’ve met with firms looking for a better understanding of how the state’s actions may affect their investments.

“We’ve had the gamut, some from New York and some from not as far away,” Burke said in a phone interview. Given their investments, she said, “it’s not surprising that they would come here and see what’s going on. I wouldn’t expect anything less.”

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