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PG&E Accepts Dividend Restrictions In Restructuring Deal With Governor

Essential Energy Insights - June 11, 2020

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PG&E Accepts Dividend Restrictions In Restructuring Deal With Governor

PG&E Corp. agreed to forgo paying shareholder dividends for about three years, accept more stringent state oversight and replace certain existing financing with $7.5 billion of securitization financing to reduce the rate impact on customers and to accelerate payments to wildfire victims under a new deal with California Gov. Gavin Newsom to emerge from bankruptcy court protection.

The utility filed details of the agreement in a March 20 motion with the U.S. Bankruptcy Court for the Northern District of California, outlining new commitments to its plan of reorganization that is supported by the governor, who was previously critical of the plan and its compliance to Assembly Bill 1054.

After reaching a restructuring agreement with bondholders in January, the plan now needs approval from the bankruptcy court and the California Public Utilities Commission. The PUC must approve the plan by June 30 in order for PG&E and utility subsidiary Pacific Gas and Electric Co. to participate in the state's $21 billion wildfire insurance fund to cover the costs of future wildfires linked to utility infrastructure. Should the PUC not approve the plan by the deadline, the motion sets forth the appointment of a chief transition officer to oversee a massive asset sale of the company with a schedule that allows for the closing of a sale no later than Sept. 30, 2021.

PG&E, California's largest utility, filed for bankruptcy protection Jan. 29, 2019, under the weight of billions of dollars in liabilities associated with wildfires in 2017 and 2018. On March 17, 2020, PG&E agreed to plead guilty to 84 counts of involuntary manslaughter and one count of unlawfully causing the deadly 2018 Camp Fire, as part of a plea agreement and settlement with the state of California.

Under the agreement, the utility will pay a penalty of approximately $3.5 million, in addition to $500,000 to the Butte County District Attorney Environmental and Consumer Protection Fund to reimburse costs spent on the investigation of the fire. PG&E previously reached settlements with all groups of victims from wildfires in 2015, 2017 and 2018, totaling approximately $25.5 billion.

Significant progress was made to help PG&E meet the June 30 deadline by the end of 2019. In December 2019, the federal judge overseeing PG&E's bankruptcy case approved a $13.5 billion PG&E settlement with wildfire victims, including cash and equity, and an $11 billion cash settlement with holders of subordinated claims against the utility. PG&E has also proposed $1 billion in settlements with insurance companies and public entities, as it seeks approval of its restructuring plan by the bankruptcy court and by the PUC.

All told, the bankruptcy reorganization carries a $57.65 billion price tag.

The company agreed to a post-bankruptcy 30-year securitization transaction of about $7.5 billion with reduced payments in early years that would replace the temporary utility debt and would have not net rate impact for customers, on average. The securitization includes offsetting credits to be funded initially from a reserve account and further funded with the value of net operating losses contributed in the year in which the net operating losses are utilized.

The reorganization plan, however, is not contingent on the approval of the securitization and, in the event the securitization is not approved, PG&E has committed to use the proceeds of net operating losses to amortize the temporary utility debt.

The plan also stipulated the reorganized company will not pay common dividends until it has recognized $6.2 billion in non-GAAP core earnings following the plan's effective date.

Winning approval from the governor puts the restructuring plan on much better footing. Newsom, who pushed to install a new board of directors that would prioritize safety, previously claimed PG&E's restructuring proposal did not comply with the state wildfire statute AB 1054.

While passage of AB 1054 helped stabilize the regulatory environment for California utility investors, Regulatory Research Associates, a group within S&P Global Market Intelligence, in January 2019 lowered the ranking of the state to Average/1 from Above Average/3. In so doing, RRA said that although the legislation mitigates some of the future wildfire risk, the failure to address the inverse condemnation doctrine and move away from a strict liability standard continues to pose higher-than-average risks for investors in all of the state's utilities.

RRA again lowered the ranking of California regulation in August 2019, to Average/2 from Average/1, citing ongoing uncertainty for investors with respect to the PG&E Corp. bankruptcy and a sense that the frequency with which severe weather-related events are occurring argues for a more comprehensive approach than was outlined in newly enacted legislation.

Nevertheless, other relatively constructive paradigms, including the cost-of-capital adjustment framework, use of electric and gas decoupling mechanisms, and performance-based ratemaking provisions, in RRA's view, support a ranking within the average range for the state. RRA is now affirming the Average/2 ranking of the state in light of these ongoing developments. For additional detail concerning the regulatory ranking process, refer to RRA's State Regulatory Evaluations report.

As the primary state regulator of PG&E, before the Chapter 11 case can be resolved, the PUC must review and approve any proposed plan and related transactions and find that they comply with California law, including AB 1054. The preliminary scope of issues include, among many issues, whether the settlement provides satisfactory resolution of monetary fines or penalties for PG&E's pre-bankruptcy conduct, whether to approve changes to PG&E's governance structure, whether the plan is consistent with the state's climate goals, and whether the plan is rate-neutral on average.

The commission initially planned its review of the plans of reorganization with the nonfinancial issues, such as safety, climate change and governance issues, to be addressed first and financial issues to be addressed at a later date. However, those two issues were later consolidated into a single phase. Evidentiary hearings were held Feb. 25 through March 4 and opening briefs were filed March 13. Reply briefs are due March 26.

The U.S. Bankruptcy Court for the Northern District of California has scheduled a hearing on PG&E's motion for an order approving the case resolution contingency process and granting related relief April 7.

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Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a full listing of past and pending rate cases, rate case statistics and upcoming events, visit the S&P Global Market Intelligence Energy Research Home Page.

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