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PG&E planned bankruptcy surprises some; utility breakup appears likely


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PG&E planned bankruptcy surprises some; utility breakup appears likely

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A California firefighter sprays water as flames from the Camp Fire consume a home in Magalia, Calif., in early November 2018. PG&E Corp. and subsidiary Pacific Gas and Electric Co. face billions of dollars in potential liabilities from California's catastrophic wildfires.
Source: Associated Press

While details around PG&E Corp.'s planned reorganization remain vague, Wall Street analysts and industry observers expect the company's structure to ultimately look different than it does today.

"We expect asset sales or spins to be a key focus, and see the potential for splitting off [PG&E Corp.'s] gas business, selling real estate ... and potentially separating the electric transmission business," Morgan Stanley & Co. LLC analyst Stephen Byrd wrote in a Jan. 15 research report.

PG&E Corp. and utility subsidiary Pacific Gas and Electric Co. on Jan. 14 announced they filed a 15-day notice of intent to seek Chapter 11 reorganization. The reorganization is expected to help PG&E Corp. and its utility, known as PG&E, resolve billions of dollars in potential liabilities as a result of the 2017 and 2018 Northern California wildfires, while continuing to provide service to customers.

"We believe a court-supervised process under Chapter 11 will best enable PG&E to resolve its potential liabilities in an orderly, fair and expeditious fashion," PG&E Corp. interim CEO John Simon said in a news release. Geisha Williams stepped down from her role as CEO prior to the bankruptcy announcement.

Byrd said the planned reorganization notice "comes earlier than we had expected," and that Morgan Stanley had seen several ways for PG&E Corp. to sustain its liquidity for another 12 to 18 months as it awaited regulatory, legal and legislative clarity.

"Absent some significant piece of legislation ... we think it is quite likely the company will file for Chapter 11," Byrd acknowledged.

Morgan Stanley said it continues to see "multiple potential paths forward and a wide range of outcomes given the options enabled by a Chapter 11 filing." The firm noted that most of these outcomes will likely involve some form of state support along with asset sales and segmenting of subsidiaries.

"The value of [PG&E Corp.'s] assets continue to exceed total liabilities by our estimates," Byrd wrote.

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SSR LLC analyst Hugh Wynne said in a Jan. 14 report that a PG&E Corp. bankruptcy filing would allow the company to consolidate all the wildfire damage claims into a single proceeding and help facilitate the sale of its businesses.

"To the extent [PG&E Corp.] plans to sell assets or the component parts of its business, and apply the proceeds to pay third party damage claims, bankruptcy permits these assets or businesses to be sold free and clear of any liens or wildfire liabilities," Wynne wrote. "Such sales would be virtually impossible outside of bankruptcy due the risk buyers would face from wildfire claims."

SSR estimates the sale of PG&E Corp.'s gas and power generation businesses could raise approximately $18 billion, net of associated debt.

Macquarie Capital (USA) Inc. said it had expected PG&E Corp. to work with California lawmakers and the California Public Utilities Commission on capping its fire-related liabilities.

"Instead, [PG&E Corp.] chose a federal bankruptcy court as the best path forward to solve all fire-related issues," analysts wrote in a Jan. 14 report. Macquarie downgraded PG&E Corp.'s stock to "neutral" from "outperform" and cut its price target to $11 from $43, incorporating about $35 billion in potential wildfire liabilities.

The company's stock closed at $6.36 on Jan. 17.

Macquarie noted that PG&E Corp.'s potential fire-related claims and California's inverse condemnation law, and not its power contract obligations, are the key factors that will drive the company to file for Chapter 11 protection.

While utility PG&E honored its power purchase agreements in its 2001 bankruptcy proceeding during the California energy crisis, there are concerns this time around about the impacts on yieldcos and entities with large contract exposure.

CreditSights finds it unlikely that the utility will reject it above-market renewable contracts, finding that such a move "does not benefit the debtor whatsoever."

"Unlike most bankruptcies where rejecting a PPA increases the earnings and value of the remaining business this is not the case with [PG&E Corp.]," CreditSights analyst Andrew DeVries wrote in a Jan. 16 report. "[A] potential contract rejection would join the unsecured claims pool and jeopardize fire victims receiving par on their claim since the value of the estate doesn't increase from doing so."

Some analysts do believe a bankruptcy filing would make it possible for PG&E Corp. and perhaps other California utilities to challenge the state's inverse condemnation rule, under which investor-owned utilities may be liable for fire damages even without a finding of negligence.

"Bankruptcy does not force the state to change policy nor can it change state law," Wynne wrote. "However, a bankruptcy proceeding could increase the sense of urgency among legislators, regulators and the governor, spurring change."

Macquarie, however, believes PG&E Corp. is likely hoping the federal bankruptcy court will find that the current application of state law constitutes "wrongful taking" under the U.S. Constitution.

California lawmakers in 2018 passed a measure, Senate Bill 901, that gave utilities limited financial protection but stopped short of deeper reforms tied to wildfire liability.