A firefighter surveys a building destroyed by a wildfire near Calistoga, Calif.
If PG&E Corp.'s utility infrastructure is found to have played a role in causing some of the massive wildfires sweeping Northern California, the company could face significant liability, especially as the death toll rises.
The California Department of Forestry and Fire Protection is still investigating what caused the blazes that started Oct. 8 and continue to burn in Sonoma, Napa and nearby counties, but the regulator said it is taking a hard look at whether Pacific Gas and Electric Co.'s power lines or other electrical equipment could be to blame.
"The concern for investors is whether [PG&E] did not adequately trim trees around their power lines," Wells Fargo analysts wrote in an Oct. 13 note. "In the absence of inadequate tree trimming, we think that property damage attributable to [PG&E's] infrastructure should be largely covered by insurance. Conversely, if [PG&E] is deemed negligent, there could theoretically be costs borne by shareholders particularly given the loss of lives."
More than 30 deaths have been reported in the ongoing wildfires.
PG&E could be considered culpable not only if it had not kept trees and vegetation far enough away from power lines but also if the company's power poles or lines were susceptible to falling in windy conditions, Morgan Stanley analysts said in an Oct. 13 note. Based on precedent at the California Public Utilities Commission, the state expects utilities to make sure their power poles are able to handle wind speeds upward of 90 miles per hour, Morgan Stanley said, pointing to a 2014 CPUC utility pole primer that cited a past investigation.
As wildfires burn near Calistoga, Calif., fire trucks bring in emergency responders to battle the blaze.
Regulators may not find fault with PG&E if trees that had been sufficiently trimmed fell in high winds onto the company's lines, the analyst notes said.
PG&E has said it works all year to reduce the risk of wildfires, monitoring vegetation around power lines and that it follows state and federal vegetation clearance distance rules.
Determining the relationship between the trees and the power lines in the gusty conditions that preceded the fires may be difficult. "We believe there is a significant probability that PG&E is found not to be at fault, given the prospects that the high winds caused trees (that had already been damaged from drought) to hit PG&E's equipment (a cause of damage for which we see a lower probability that PG&E would be held to be at fault), rather than the potential, which we view as lower probability, that PG&E's wires and/or poles were directly damaged by the high winds," Morgan Stanley analysts wrote.
PG&E was held responsible for a 2015 wildfire, known as the Butte fire, after the CPUC found that the utility had not taken all the necessary precautions to safeguard its equipment and had not reported issues when it was supposed to. The company was fined $8.3 million for that incident and was liable for cleanup, repair and legal costs, along with possible third-party complaints.
PG&E said it had liability insurance of about $900 million for the Butte Fire, and at the end of 2016, it said it was expecting to recover $625 million from insurance, the Morgan Stanley analysts said. The company did have $137 million in after-tax charges, with about a 27-cent-per-share impact on earnings, Morgan Stanley said.
The utility said it was unknown if they would have liability associated with the fires, but noted that it has about $800 million in liability insurance for potential losses, according to an Oct. 13 filing with the SEC.
"If the amount of insurance is insufficient to cover the utility's liability or if insurance is otherwise unavailable, PG&E Corporation's and the utility's financial condition or results of operations could be materially affected," the filing said.
PG&E's stock closed Oct. 13 at $57.72, down 10.5% on the day. The stock lost more than 16% of its value during the week, after closing at $68.84 on Oct. 6.
PG&E spokesman Donald Cutler said the need for insurance will depend on the outcome of an investigation into what caused the blaze.
"Right now we're really focused on ... safety and supporting first responders as we deal with the fires that are going across our service area. ... We can't speculate on the cause, and we support a review from a regulator," Cutler said Oct. 13.
Looking at properties that are at high risk for damage in the current blaze, Morgan Stanley said some estimates put the total reconstruction cost at more than $5 billion. Including property with moderate risk, that total exceeds $6 billion, the analysts said.