PG&E's Exoneration From Fire Seen as Too Little, Too Late

(Bloomberg) -- California has cleared PG&E Corp. of responsibility for one of the deadliest blazes in its history. And that still probably won’t be enough to prevent the state’s largest utility from going bankrupt as it faces billions of dollars in wildfire liabilities.

The state’s finding that PG&E’s equipment isn’t responsible for the Tubbs fire, which tore through wine country in 2017, may slash the company’s estimated $30 billion in liabilities, but not by enough to offset damages from other fires and mounting lawsuits, analysts said. PG&E itself said it still faces “significant costs,” and it’s continuing to plan for a bankruptcy filing as soon as next week, according to people familiar with the matter.

The Tubbs report sent PG&E’s battered shares soaring 75 percent Thursday, the most on record, as investors cheered any indication the company’s dire financial straits may improve. On Friday, the shares retreated, falling as much as 16 percent to $11.73 in intraday trading in New York.

California Governor Gavin Newsom estimated that the finding would reduce the utility’s projected liabilities by as much as $17 billion, an amount he stressed “isn’t insignificant.” But he also said a Chapter 11 filing is up to PG&E, not the state, a sign that he won’t step in even after the government removed a big overhang for the company.

“They dodged a huge bullet, but the company likely still is headed to bankruptcy,” said Kit Konolige, a utility analyst for Bloomberg Intelligence. “I think they will decide that it’s basically too little, too late.”

PG&E's Exoneration From Fire Seen as Too Little, Too Late

The Tubbs fire was the most destructive in state history until November’s Camp fire, which killed 86 people and is suspected of having been started by PG&E equipment. Even with Thursday’s rally, the company’s shares have plunged more than 70 percent since that blaze began as Wall Street bet that liabilities will push it into insolvency. It’s a collapse that has already reduced some of its power suppliers’ credit to junk, sent shares of other California utilities falling and put the state’s bonds under scrutiny.

Moody’s Investors Service, which cut PG&E’s rating to junk earlier this month, said Thursday that the Tubbs fire finding doesn’t change its assessment of the company.

“PG&E’s numerous regulatory, legislative and credit challenges are largely unchanged and we still expect them to file for Chapter 11 bankruptcy protection in the next few days,” Moody’s analyst Jeff Cassella said in a statement.

PG&E's Exoneration From Fire Seen as Too Little, Too Late

Without directly addressing whether its bankruptcy plans would go forward, San Francisco-based PG&E said in a statement that “resolving the legal liabilities and financial challenges stemming from the 2017 and 2018 wildfires will be enormously complex and will require us to address multiple stakeholder interests, including thousands of wildfire victims and others who have already made claims and likely thousands of others we expect to make claims.”

Analysts said the reduction in liabilities was less than Newsom’s estimate. “This has the potential to lower the $30 billion in fire claims down to the low $20 billion range,” said Andy DeVries, an analyst at CreditSights. He described the Tubbs fire finding as “a real game changer” that begs the question of whether the company still need to file for bankruptcy.

PG&E's Exoneration From Fire Seen as Too Little, Too Late

The Camp fire, however, “remains a major financial concern,” said Travis Miller, an analyst at Morningstar.

“I don’t think this removes the bankruptcy scenario,” Miller said. “PG&E still faces financial distress simply given that the capital markets are not open for business for them. This is a positive development, but the fact remains that PG&E faces tens of billions in liabilities.”

Other Fires

California investigators have already named PG&E equipment as the ignition source of 17 of the 2017 fires that ravaged the state while alleging violations of state law in 11 of those incidents. The blazes include the Redwood, Atlas and Nuns fires, some of the largest and deadliest to hit wine country.

PG&E has long held that its equipment might not be responsible for the Tubbs fire, which accounted for about 60 percent of the total structural damage from the 2017 wildfires, according to JPMorgan Chase & Co. The report Thursday by the California Department of Forestry and Fire Protection found that it was caused by a private electrical system adjacent to a home.

The Tubbs report may be used by stakeholders who were already arguing against a bankruptcy to make their case. BlueMountain Capital Management, a PG&E shareholder, said the Tubbs news “is yet another example of why the company shouldn’t be rushing to file for bankruptcy, which would be totally unnecessary and bad for all stakeholders,” according to a spokesperson. The investment firm said earlier Thursday that it was seeking to replace all of PG&E’s board members.

A bankruptcy filing may not be the right path, given that the Tubbs fire report brings a “significant reduction” in liabilities and political cover for the state to support the company, said Praful Mehta, an analyst with Citigroup Inc. Nonetheless, he expects PG&E to proceed with its plan.

“At this time, only a push from the governor’s office stops a filing,” he said in a report.

Such a move would have to come quickly.

“One of the key things that pushed them to talk about filing in the first place was the very slow progress that the state was making in even addressing any of these issues, much less solving them,” Bloomberg Intelligence’s Konolige said.

Some recent analyst note on PG&E:

  • Guggenheim analysts led by Shahriar Pourreza maintain that absent incremental wildfire charges in excess of around $2 billion pretax, PG&E should remain solvent and don’t view bankruptcy as warranted.
  • Morgan Stanley analysts led by Stephen Byrd raised their price target on PG&E to $17.50 a share from $13.
  • JPMorgan Chase & Co., analysts led by Christopher Turnure raised their price target to $11 a share from $10.

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