A bankruptcy filing reportedly is not PG&E's preference for addressing the liabilities, but the preparations could put pressure on California politicians hoping the company can avoid such an outcome. It's a risky game, though, as Monday's market reaction showed.
The embattled California utility faces billions of dollars in liabilities as a result of wildfires over the past two years, and could seek protection for some or all of its businesses, Reuters reports, citing people familiar with the matter.
The San Francisco-based company has lost more than half its market value since the deadliest wildfire in California history broke out in early November.
Some analysts said the stock reaction may be overblown.
"We assess this announcement as the culmination of a decisive souring of the political and regulatory environment", S&P said in a statement. "Bankruptcy has been on the table for many months, if not years".
Similarly, State Farm said that PG&E was "failing to keep the power lines, wires, and any and all associated equipment in a safe condition at all times to prevent fires". That said, it has yet to determine a specific cause for the wildfire.
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"Our US$29 target does not assume anything for Tubbs" liabilities, he said in a research note Monday.
The utility, California's largest, is contending with potentially crippling liability costs related to California's Camp Fire. It would extend legislation that allows PG&E to issue bonds to pay off the costs tied to the 2017 blazes.
The company is considering the move as a contingency, in part because it could soon take a significant financial charge for the fourth quarter of 2018 related to liabilities from the blazes, the sources said. Because of potential legislative aid, PG&E has not yet determined whether it will make a bankruptcy filing, Reuters reported. The company could be engaged in similar brinkmanship now, he said. But that is just a possibility, they said, so bankruptcy preparations are being made. "Last year, they were able to fool the legislature with the narrative of bankruptcy or bailout, and the legislature gave them a bailout".
Still, a potential bankruptcy may be enough to force the hand of state legislators.
PG&E, whose shares have lost almost half of their value since the wildfire, said it is working with a leading search firm to identify new directors and is interviewing several candidates.
"We want to tap fresh perspectives and additional expertise to help address the changing nature of PG&E's business and the challenges it faces now and in the future", the board said in a statement.