(Bloomberg) -- The implications are unsettling: 15 minutes before a fire was reported among the trees north of Sacramento -- the spark that would explode into the deadliest blaze in California history -- a PG&E power line in the area went offline.
A week later, at least 56 people have been found dead -- and PG&E Corp. is facing its gravest crisis yet over whether its equipment has ignited another devastating wildfire.
The exact cause of the fast-moving Camp Fire may not be known for months or even years. But in Sacramento and on Wall Street, a reckoning for PG&E may finally be at hand.
After limping out of bankruptcy in 2004, California’s largest utility is once again under pressure. Underscoring its financial straits, PG&E said late Tuesday that it had exhausted its revolving credit line. It also said that if it’s held responsible for the fire that destroyed the town of Paradise, the liability would exceed its insurance coverage.
That comes as the company is already facing as much as $17 billion in liabilities, according to a JPMorgan Chase & Co. estimate, from a swarm of wildfires that charred parts of Northern California wine country last year. State investigators have blamed PG&E equipment for sparking 17 of last year’s blazes. A report on the most destructive of those is still outstanding.
With two sets of calamitous fires within 13 months, Wall Street is confronting the question of how PG&E can sustain billions of dollars of liabilities that could keep piling up. Shares of the San Francisco-based company plunged the most in 16 years on Wednesday and have tumbled 48 percent since the Camp Fire started, erasing about $12 billion in market value. Holders of $18 billion of bonds are bracing for the utility’s credit ratings to be cut.
“Investors are understandably beginning to question the wisdom of continuing to commit capital to California’s investor-owned utilities absent a more comprehensive wildfire liability policy fix,” said Jonathan Arnold, a utility analyst for Deutsche Bank AG.
There’s also concern about the prospect, however remote, that PG&E might be forced into bankruptcy again.
“The risk of bankruptcy is very real for these guys and with each passing wildfire that risk increases,” Jaimin Patel, a credit analyst for Bloomberg Intelligence, said in an interview. “They will almost certainly need help from the state."
Lawmakers Mum
When and whether the state steps in to protect the utility remains an open question. Lawmakers have yet to indicate that they will help after providing some assistance earlier this year.
For now, they say they are focused on the effort to put out the blazes -- the Camp Fire was only 35 percent contained as of Wednesday, and another one outside of PG&E territory is burning north of Los Angeles -- and helping the victims recover. Governor Jerry Brown didn’t address the PG&E issue during a news conference Wednesday in fire-stricken Butte County. Kevin Liao, a spokesman for Democrats in the state Assembly, said legislators aren’t currently working on any plan to help the utility.
The earliest any action is likely to occur would be in January, when a new legislative session begins with members elected this month and incoming governor Gavin Newsom is sworn in.
The state would probably step in to protect the utility and its customers in the event of a bankruptcy, Citigroup Inc. analyst Praful Mehta said in a research note Wednesday. Indeed, some analysts read the credit line news as a tacit cry to state lawmakers for help.
“If California wants solvent utilities, the legislature needs to go back to the drawing board,” said John Bartlett, a utility portfolio manager at Reaves Asset Management.
Liability Laws
PG&E had lobbied state lawmakers over the summer to change how California applies “inverse condemnation,” a legal doctrine under which utilities can be held liable for any economic damages tied to their equipment, even if they follow all safety rules. PG&E Chief Executive Officer Geisha Williams has called the doctrine bad policy that essentially makes utilities the default wildfire insurer of the state.
Lawmakers didn’t kill inverse condemnation despite Brown’s urging. Instead, they passed legislation this year, known as SB901, that allowed PG&E to use state-authorized bonds to pay off lawsuits from the 2017 fires and gave utilities a mechanism for recovering some wildfire costs starting next year, so long as the fires weren’t caused by company negligence. But it didn’t specifically address how to handle the costs of any fires their equipment might trigger in 2018.
PG&E’s potential liability if they are found responsible for this year’s fires could be as much as $15 billion, bringing the two-year total to as much as $30 billion, Citigroup estimated. That well exceeds the company’s current market value of $13.3 billion.
Investors are unlikely to have clarity over PG&E’s fate anytime soon. Given that it’s taken more than a year to determine responsibility for the 2017 Tubbs Fire, answers on the Camp Fire may not be near. A legislative solution, meanwhile, “would probably take most of the year,” said Jeffrey Cassella, an analyst for Moody’s Investors Service. "It could take some time.”
--With assistance from Jim Efstathiou Jr., Molly Smith, Allison McNeely, Romy Varghese and Alex Tribou.
To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net
To contact the editors responsible for this story: Joe Ryan at jryan173@bloomberg.net, Kara Wetzel, Dan Reichl
©2018 Bloomberg L.P.
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