PG&E Corp. was cleared of blame for a deadly 2017 blaze just days before the California utility giant was set to file for bankruptcy to deal with crippling wildfire liabilities. And yet the company has given no indication that it’s changing course.
The finding by the California Department of Forestry and Fire Protection on Thursday may reduce PG&E’s projected $30 billion in liabilities from 2017 and 2018 wildfires by $17 billion, state Governor Gavin Newsom told reporters in Sacramento, stressing that the report “isn’t insignificant.” But analysts were giving smaller estimates – to the tune of $8 billion – and PG&E said in a statement that it still faces “significant potential” costs.
The mere possibility that PG&E may see its massive fire damages shrink sent the stock surging by the most on record. The Tubbs fire that the company’s equipment was cleared of igniting was the second-most-destructive blaze in state history, destroying thousands of homes and killing 22 people. Whether the report will be enough to save the company from insolvency – triggering a ripple effect that has cut its power suppliers’ credit to junk, sent shares of other California utilities falling and placed the state’s bonds under scrutiny — remains to be seen.
Andy DeVries, an analyst at CreditSights, described the finding as “a real game changer” that begs the question of whether the company still need to file for bankruptcy. “This has the potential to lower the $30 billion in fire claims down to the low $20 billion range,” he said.
Without directly addressing whether its bankruptcy plans would go forward, 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.”
Shares of San Francisco-based PG&E skyrocketed as much as 81 percent on the news, its biggest intraday gain ever, and ended the session up 75 percent at $13.95. It’s still down more than 70 percent since November, when the deadly Camp Fire broke out.
The company’s 6.05 percent bonds due March 2034 jumped 5 cents on the dollar to 87 cents and its 6.35 percent notes due February 2038 gained 5 cents to 88 cents, according to data compiled by Bloomberg.
Travis Miller, an analyst at Morningstar, said the 2018 Camp Fire, the deadliest in California history, “remains a major financial concern” for PG&E.
“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.”
Bank of America Merrill Lynch analysts led by Julien Dumoulin-Smith also said the company’s still likely to file.
“Despite the company already arguing its equipment was not involved in Tubbs in various civil proceedings, the board and management still chose to move forward” with plans for a filing, they wrote in a note. The company may still want to push its liability issues into federal jurisdiction in bankruptcy court, they said.
California investigators had already named PG&E equipment as the ignition source of 17 of the 2017 fires 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 of the so-called Wine Country blazes.
“After an extensive and thorough investigation, Cal Fire has determined the Tubbs Fire, which occurred during the October 2017 Fire Siege, was caused by a private electrical system adjacent to a residential structure,” according to a statement Thursday. “Cal Fire investigators did not identify any violations of state law, Public Resources Code, related to the cause of this fire.”
PG&E said in a federal court filing in December that its equipment might not be responsible for the Tubbs fire. It elaborated on a theory that the 2017 blaze was started by “customer-owned equipment” at a residential property in Napa County owned by Ann Zink. Using a regulator’s classification of Zink’s residence as an “incident location,” PG&E pointed to a “service riser” on her house “after the point at which PG&E had legal responsibility for operation, inspection and maintenance” of the suspected electrical equipment. Zink couldn’t immediately be reached for comment.
Tubbs accounted for about 60 percent of the total structural damage from the 2017 wildfires, according to a report by J.P. Morgan Securities.
PG&E has said its fire-safety programs have met the state’s high standards and that it has taken a number of steps to reduce fire risk, including pruning or removing about 1.4 million trees a year. Under California law, utilities including PG&E and Edison International may be held liable for costs if their equipment is found to have caused a fire, even if they followed safety rules.
Some stakeholders who were already arguing against a bankruptcy used the Tubbs report to hammer home their points.
Looking at the Tubbs report, the question is, ‘Why would PG&E file bankruptcy?'” said Michael Danko, a lawyer suing the company on behalf of victims of wildfires in Northern California. “PG&E just basically found $11 billion. It’s hard to argue that they are in any fashion insolvent.”
The Tubbs report may also diminish the impact of lawsuits, Danko said. While Cal Fire’s conclusion can’t be used in court, the evidence it gathered can. The agency’s report finding PG&E not responsible “is an indication that our case with regard to the Tubbs fire will be very difficult for the Tubbs fire victims,” Danko said.
BlueMountain Capital Management, a New York-based investment firm and PG&E shareholder fighting to keep the company from filing, 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. BlueMountain said earlier Thursday that it was seeking to replace all of PG&E’s board members at the company’s annual shareholder meeting.
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