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PG&E gas utility sale would not offset wildfire liability, analysts say

Pacific Gas and Electric Co. would realize few benefits from selling off its gas utility assets, even as the company stares down potential multibillion-dollar liabilities in the wake of wildfire devastation, analysts said Jan. 7.

"[The gas business] is so small ... it's not going to move the needle," Guggenheim Partners analyst Shahriar Pourreza said in an interview. "I don't see that as something that would negate the liabilities that they're dealing with right now."

The core gas assets of the utility company known as PG&E could be worth about $4 billion, Pourreza said, noting that the figure is a small proportion of both the company's liabilities and its overall business, even if sold at a premium.

PG&E's exact liabilities associated with 2017 and 2018 wildfires remain up in the air as investigations into the fires' causes continue and state legislators consider how to handle cost allocation for utilities whose infrastructure is involved in the cause of wildfires. Recent reports have put the worst-case scenario for PG&E's liabilities at as much as $30 billion. Guggenheim Partners estimated that it could be closer to $24 billion.

To manage some of these costs, parent company PG&E Corp. may be considering selling off its gas utility division in the spring, National Public Radio reported Jan. 4, citing current and former PG&E Corp. officials speaking anonymously.

In response to the tumult, PG&E Corp. share prices have plummeted, opening at $18.50 on Jan. 7, down 24% from the Jan. 4 stock market close and tanking the company's market capitalization.

JP Morgan Securities analysts in a Jan. 6 note saw similar problems with the relative value of the gas utility's assets and the company's potential wildfire liabilities, especially factoring in the company's $19 billion in unsecured debt.

"Should PG&E be found as the source of all ignition in 2017 and 2018 events ... there is no realistic way for the company to finance this obligation despite its strong ongoing cash flow and otherwise healthy business and balance sheet," JP Morgan said.

Height Capital Markets analysts said Jan. 7 that they see the sale of major PG&E assets — the gas business, the electric business or both — as a possible "fresh start" that California's utility space "desperately needs," but selling the electric division could be challenging in light of the wildfire liabilities, and selling the gas division may be ineffective at addressing the utility's problems.

"[PG&E Corp.] appears willing to explore a sale of the gas utility business, separately, either inside or outside a bankruptcy context. However, this is a one-time salve for a perpetual problem — the issue of unconstrained wildfire liabilities," the Height analysts said.

While PG&E's gas business is not without its problems — state regulators recently alleged that the utility had falsified tens of thousands of gas safety records over five years, exposing the company to potential penalties — it appears at this juncture to be more stable than the power side.

"It is a business that earns. It's a business investors like," Pourreza said. "The electric business is [PG&E's] main business ... and really where you're having many of your issues right now."