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PG&E's initial plan to honor power contracts offers hope to counterparties

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PG&E's initial plan to honor power contracts offers hope to counterparties

Pacific Gas and Electric Co., or PG&E, and its parent, PG&E Corp., filed a proposed reorganization plan Sept. 9 that would honor existing power purchase agreements, giving contract counterparties some cause for optimism as the companies' joint bankruptcy court proceedings extend into 2020.

In a Sept. 9 document filed with the U.S. Bankruptcy Court of the Northern District of California, the companies said they would honor "all power purchase agreements, renewable energy power purchase agreements, and community choice aggregation servicing agreements." Under the plan, the debtors will make any payments necessary to correct any issues with the contracts, CreditSights analysts Charlotta Chung, Andrew DeVries and Nick Moglia wrote in a Sept. 10 note.

"While we do not expect that the debtors' plan in its current form will glide through to confirmation unchanged, we think that its terms are an important baseline for future negotiations with key stakeholders," the CreditSights analysts wrote.

The initial reorganization plan's promise to honor power purchase agreements, or PPAs, is good news for the contracts' counterparties and their projects as companies saw their cash flows at these power plants become stuck and not available for distribution to project developers and owners. However, the companies' plan does not provide much detail on the issue or address legal complications that have emerged from their desire to explore contract cancellation earlier in the bankruptcy proceeding.

PG&E previously said it has $42 billion in commitments through 387 PPAs, totaling about 13,668 MW of capacity. S&P Global Market Intelligence data shows a total of 11,420 MW of contracts. Of that, 55% comes from renewables, including solar, wind, biomass, geothermal, and hydro, while 40% is tied to natural gas plants. At least 592 MW of contracted capacity comes from other nonrenewable projects including nine planned storage facilities.

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The two largest contracted projects include the 648-MW Russell City Energy Center in Alameda, Calif., which Calpine Corp. co-owns with GE Energy Financial Services. In December 2018, GE Energy Financial Services received approval from the Federal Energy Regulatory Commission to sell its stake in Russell City to asset manager Apollo Global Management Inc. The largest power contract by capacity underpins the 805-MW Marsh Landing Generating Station in Contra Costa County, Calif., which is owned by Clearway Energy Inc., a subsidiary of fund manager Global Infrastructure Management Participation LLC.

Clearway Energy, Calpine and subsidiaries of NextEra Energy Inc. represent the three top owners of contracted capacity with PG&E and its affiliates, according to S&P Global Market Intelligence data. Calpine owns 1,254 MW of contracted capacity, Clearway Energy follows with 1,216 MW, and NextEra's affiliates have 758 MW.

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NextEra's yieldco, NextEra Energy Partners, has between $95 million and $105 million in cash that is unavailable for distribution because it is from projects with PG&E contracts, executives said during NextEra's July 24 earnings call. NextEra executives have implemented various project financing tactics to mitigate the effects from the bankruptcy, such as NextEra Energy Partners launching a cash tender offer for all $240.4 million outstanding 5.60% senior secured notes due 2038 from Genesis Solar Funding LLC, the indirect owner of the 250-MW Genesis Solar Energy Project.

NextEra, Calpine and Clearway did not respond to requests for comment on their PPAs with PG&E.

During NextEra's June 20 investor conference, NextEra Energy Partners Executive Vice President Mark Hickson said, "We are confident in our ability to reach a successful resolution of the PG&E situation."

On Sept. 11, Moody's upgraded the senior secured notes underpinning First Reserve Corp. and Gas and Power Co. Ltd.'s 247.4-MW combined-cycle natural gas Crockett Cogeneration power plant to Caa1 from Caa3 and upgraded Ares Owners Holdings LP's 412-MW gas-fired Panoche Energy Center to Caa1 from Caa2. Moody's also raised its rating on senior secured debt issued by Berkshire Hathaway Energy subsidiary BHE Solar LLC's Topaz Solar Farm to Caa1 from Caa2. Additionally, Moody's revised its outlook for these three projects to positive from negative, plus ExGen Renewables IV LLC's senior secured term loan and WG Partners Acquisition LLC's senior secured bank credit facility.

Moody's said the upgrades and revised outlooks reflect how PG&E's initial plan is a step in the right direction for renewable energy companies and utilities with power contracted to the utility. However, Moody's warned that risks to these projects' credit remain since PG&E still reserves the right to amend the plan.

PG&E-linked projects' credit quality remains "tempered by the possibility that PG&E's final approved plan could differ from the current plan particularly if PG&E is not able to emerge from bankruptcy by June 30, 2020 or if additional claims surface from wildfires that might occur over the next several months which would be treated as administrative claims," Moody's analysts wrote.