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Wall Street warns worst may be yet to come for PG&E exposure to wildfires

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Wall Street warns worst may be yet to come for PG&E exposure to wildfires

The four wildfires tied to Pacific Gas and Electric Co. power lines are "small potatoes" compared to the larger investigation into several deadly October 2017 blazes that engulfed Northern California, Wall Street analysts warn.

Cal Fire, California's Department of Forestry and Fire Protection, has accused the PG&E Corp. subsidiary of violating state law in three incidents where a tree or tree branches contacted or knocked down power lines and sparked the wildfires. The three fires tied to alleged tree clearance code violations burned less than 1,000 acres in total with about 60 structures destroyed, but there were no reported fatalities or injuries.

"While the causes to the largest and most damaging fires have yet to be determined, probabilities seem to be working in the wrong direction for [PG&E] as these early results could serve as a precursor," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a May 29 research report.

"Despite statements from the company that its prevention programs met the 'high standards' of the state, indications from state investigators thus far seem to indicate otherwise with these first set of results pointing to improper vegetation management and/or failure to operate its facilities reasonably," the analyst added.

Guggenheim has a "sell" rating on PG&E stock. PG&E shares dropped more than 5% to $42.34 in above-average trading on May 29, the first full business day after the Cal Fire findings were released May 25.

Morgan Stanley & Co. LLC analyst Stephen Byrd said investors should exercise caution when weighing the negative data point inferred by the market from the investigation.

"Until we can better understand the nature of the violations, we will reserve judgment on the implications of these reports," Byrd wrote in a May 29 report. "Given the relatively small amount of damage related to these 3 fires (60 structures destroyed, no injuries), the mathematical impact on [PG&E] stock is likely in our view very small."

Cal Fire determined no tree clearance violation occurred in the largest of the four wildfires involved in its first completed investigation, even though the cause was tied to tree branches falling on Pacific Gas and Electric power lines. The La Porte Fire in Butte County burned 8,417 acres and destroyed 74 structures, according to Cal Fire.

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Liability risk

Cal Fire said it will continue to investigate the causes of multiple fires that charred more than 245,000 acres in Northern California. The wildfires swept through Napa, Sonoma, Butte, Humboldt, Mendocino, Del Norte, Lake, Nevada and Yuba counties, killing 44 people and destroying about 8,900 structures, according to a Cal Fire summary dated Oct. 30, 2017.

Among the chief concerns for investors is how much liability risk PG&E will face from the widespread wildfires and whether the utility will be allowed to recover these costs.

"The only potential 'silver lining' here is that the Cal Fire report related to the La Porte Fire ... does not indicate a violation of the law/negligence on the part of [PG&E]," Evercore ISI analyst Greg Gordon wrote in a May 29 research report. "The facts as laid out by Cal Fire make [PG&E] liable for inverse condemnation claims for this fire, so they will have to lay out dollars and warehouse the cost on their balance sheet while they seek recovery."

Analysts largely agree that the cause of the Tubbs Fire in Sonoma County, which destroyed more than 5,600 structures and killed 22 people, is the biggest outstanding wildfire liability risk facing PG&E. The Tubbs Fire tops Cal Fire's list of the 20 most destructive California wildfires in the past 100 years.

Gordon described the three fires for which Cal Fire identified PG&E as responsible, McCourtney, Lobo and Honey, as "small potatoes" compared to a potential determination of cause for the Tubbs and Nuns fires, which represent "game/set/match" for PG&E investors.

Morgan Stanley contends the cause of the blaze will be a "significant driver" of PG&E's stock price.

PG&E President and CEO Geisha Williams on a February call with analysts and investors criticized California's inverse condemnation rule, under which investor-owned utilities may be liable for fire damages even without a finding of negligence. "This is simply bad public policy," Williams said.

PG&E is challenging the practice of inverse condemnation before regulators, state lawmakers and in court.

Bills in the California State Legislature that help limit inverse condemnation exposure and provide clearer guidance on cost recovery are starting to gain momentum. However, it is unclear if something will be enacted before the session wraps up in late August.

"We believe the legislature is still in the early stages in addressing wildfire legislation," Mizuho Securities LLC analyst Paul Fremont wrote in a May 30 report. Still, the firm believes lawmakers will take action this legislative session to "provide utility companies with assistance in offsetting the high cost of wildfire damages."