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PG&E's fate hinges on legislators and regulators


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PG&E's fate hinges on legislators and regulators

Facing a financial abyss due to billions of dollars in potential liability tied to California's devastating wildfires, PG&E Corp. will need both legislative and regulatory support to avoid bankruptcy. Analysts differ, however, on the likelihood of that help arriving in time to avoid a Chapter 11 filing.

The corporation's stock price dropped more than 20% on Jan. 7 after a Reuters article quoted unnamed sources saying a bankruptcy filing within weeks is being discussed inside the company. That followed a National Public Radio report on Jan. 4 that said the company is considering selling off its $4 billion gas utility business, which analysts said would do little to offset the enormous liabilities the company may incur.

In the worst case, liabilities from the 2017 and 2018 wildfires could exceed $30 billion, J.P. Morgan analysts said, "and we do not see a realistic way for the company to fund this absent clear, timely [California Public Utilities Commission] and legislative remedies."

Height Securities LLC analysts said Jan. 7 the threat of looming bankruptcy would pressure lawmakers to act, but questioned whether that would lead to a legislative remedy, given the likely negative political fallout from what many call a "bailout" of the utility for what some see as criminal acts of negligence.

J.P. Morgan said that if PG&E Corp. subsidiary Pacific Gas and Electric Co.'s equipment is found to be the source of all of the 2017 and 2018 fires, the company — which has $19 billion in unsecured debt and a $9.8 billion market cap — could not realistically finance such liability obligations,

A recently passed state law obliges regulators to apply a "stress test" that would cap utility liabilities and pass costs to ratepayers to ensure that reliable electricity services continue. But that may not create a specific path for meeting the utility's liabilities this year, J.P. Morgan said. The legislation enables PG&E to seek approval from the PUC to issue bonds secured with revenues from customer rates to pay wildfire liabilities from the 2017 wildfire liabilities, but it did not address 2018 fires. PG&E could be held liable for the November 2018 Camp Fire, in Butte County, which was the most deadly and destructive wildfire in California history. Legislation will be needed in the upcoming session to close that gap.

"Timing is everything," said Height analysts.

Moody's is expected to complete a review by Feb. 13 that could lead to a further credit ratings downgrade for PG&E. State Assembly Member Chris Holden, the chair of the Utilities and Energy Committee, is expected to introduce a new securitization bill in this year's session. Political sentiment appears to be swinging against PG&E, though, as state fire investigators gather evidence of the utility's possible role in the Camp Fire as well as the Tubbs fire, which swept through parts of Napa, Sonoma, and Lake counties in Northern California during October 2017.

Even if Holden's bill passes, the PUC may not take action soon enough to avert a bankruptcy filing. The commission has opened a proceeding to consider reorganizing the companies' corporate structure. PG&E Corp. announced it is searching for new directors to improve the companies' safety culture.

Bankruptcy could offer a path forward for fundamental ownership and leadership changes, said Height analysts: "This could ultimately be the best outcome for the state and customers."