A firefighter drives through the Kincade Fire on October 24 2019 in Geyserville, California. Picture: AFP/JUSTIN SULLIVAN
A firefighter drives through the Kincade Fire on October 24 2019 in Geyserville, California. Picture: AFP/JUSTIN SULLIVAN

New York — Pacific Gas & Electric (PG&E) shares plunged 25% on Friday as possible liabilities from the Kincade Fire in northern California boost the risk that shareholders will be wiped out and could undermine efforts to bring the company out of bankruptcy.

It’s still unknown if this week’s fire in Kincade was caused by PG&E equipment, but the prospect raises the risk of wiping out PG&E’s equity value. This would undermine the recovery plan favoured by PG&E and its shareholders, and make it more likely that a rival plan from bond holders will win approval, Citi analyst Praful Mehta said.

Backers of the PG&E plan could terminate their financial commitment of more than $14bn if a destructive wildfire is linked to PG&E and its service territory before 2020. With wildfires continuing to spread, participants wonder whether PG&E will be able to reach a bankruptcy settlement. Another bad fire season could push them into bankruptcy again.

Earlier this month, Mehta set a street-low price target at $5 on shares, predicting there is a 75% probability the California power company’s stock would fall to zero. He reiterated the call on Friday, saying “shareholders are worried — and should be.”

If the fire is linked to PG&E during the bankruptcy process, meeting California public utilities commission’s standards on whether the disaster was handled prudently will be key, Evercore ISI analyst Greg Gordon said. State legislation limits PG&E’s access to wildfire funds to cover damages at 40%.

“PG&E has modest insurance and can access the state wildfire insurance fund (with limits), but this is a setback,” he wrote in a note to clients. “A big fire could increase overall liabilities for shareholders and threaten the viability of their equity backstop.”

If the company were found to have acted imprudently in a $10bn fire and were able to negotiate claims down to $6bn, PG&E may still be on the hook for $4.3bn, Gordon said.

Bloomberg Intelligence analyst Negisa Balluku said that a fire caused by PG&E equipment could also affect its ability to abide by California’s wildfire liability law. Such a fire would “likely lead to claims with precedence over those from the 2017/2018 California wildfires, as well as over unsecured debt.” 

With Gaurav Panchal and Rick Green

Bloomberg