Cigarbutt Posted January 16, 2019 Posted January 16, 2019 -Few random points. This will likely evolve over a few years. -A comment above was made about the Washington Public Power Supply System (WPPSS) investment made by Mr. Buffett. There may be lessons in that story but the plot was different. WPPSS was a municipal corporation or a public authority. The bonds that defaulted (1983) were for the so-called nuclear plants #4 and #5, which were separate (although legally debated for a while) from the bonds (bought by Mr. Buffett) linked (revenue bond type of arrangement) to plants #1, #2 and #3 which did not default. In fact, WPPSS did not file for bankruptcy. The bonds that Mr. Buffett bought traded at a moderate discount because of the uncertainty (munis defaulting was very rare then and the WPPSS fiasco had reached significant and very public proportions) but were backed by a regional federal power agency (although there was some legal noise too at that level) which had alternative sources of revenues that could support those bonds. Perhaps easy to say now but the situation then was markedly different from PG&E and Mr. Buffett chose the bonds that sat quite high in the fulcrum structure. Bonds were held for close to or around ten years and returns were good (especially given the tax-exempt nature of the interest) but returns were not spectacular. Potentially useful lessons for the PG&E evolving story are that 1-most of the legal noise went away and eventually settlements were reached with the #1,2,3 bonds back to par and the #4,5 bonds settling between 10 to 40 cents on the dollar and 2-even if the entity was public, there was no federal bail-out because the "injured" parties were mostly the bondholders and maybe some felt that moral hazard was worth a lesson. Remarkably, WPPSS went back to the muni market to refinance the worst bonds in 1989 and got investment-grade from the rating agencies (which graded the #1,2,3 bonds triple A until looking into the abyss (what else is new) and until a few months before default of the #4,5. -A comment was made above concerning the chapter 11 episode in 2001-4 for the PG&E entity. Just from my notes, it seems that the causes of distress were different (regulatory uncertainty, market manipulation, unstable markets) but the severity of the liquidity and solvency issues were comparable in intensity. The publicly-traded shares of the investor-owned utility continued to trade throughout and never dipped below 6$ and creditors were paid in full. This was a very complex process but I came away with the conclusion (opinion) that the surviving entity had benefitted indirectly along the painful restructuring from a not so clearly defined bail-out (state financial support) and from implicit support with higher expected rates in the future (support from the rate payers). -It looks like PG&E will file shortly and the issue has to do with the wildfire claims (2017 and 2018). There are expectations for the usual legal noise and for a lengthy process. The odds are very difficult to establish now and there is a defining and challenging feature that seems to be particularly significant. California has quite stringent laws covering the inverse condemnation rule which has to do with the exposure to liabilities regardless of negligence, which means that PG&E is liable to damages when their equipment is simply "involved". If this definition is maintained as is, I guess it may be difficult for a bankruptcy judge to let a phoenix entity emerge as there would great uncertainty to continue as a viable entity. I would guess that there is potential legislative leeway that would make the restructuring less painful without causing outrage from the moral hazard crowd. PG&E has a long history and survived (financially) the 1906 San Francisco earthquake and fire. An interesting entry point may be defined at some point because of expectations of more frequent wildfire-related losses which may be related to a perception in line with a recency bias. -Interesting to see Baupost involved in a distorted case of averaging down. At the end of Q3 2018, Baupost had 873M invested in the equity (ouch!). Apparently, they recently bought (about 30 to 35 cents on the dollar) for about a billion (face value) of insurance claims against the utility (subrogation claim with the right to sue) which may be a way to recuperate some losses or may simply be a way to be a heard voice in the restructuring process in order to maximize equity recovery. I'm not sophisticated enough to invest directly here but look forward to further interesting discussions in the following years.
deadspace Posted January 16, 2019 Posted January 16, 2019 Thanks for that summary Another interesting comparison would be Buffett's investment in USG equity which was held through their asbestos associated bankruptcy process. The equity was made whole. It could have been purchased for under $5 and eventually peaked post bankruptcy to $120
benhacker Posted January 16, 2019 Posted January 16, 2019 Thanks for that summary Another interesting comparison would be Buffett's investment in USG equity which was held through their asbestos associated bankruptcy process. The equity was made whole. It could have been purchased for under $5 and eventually peaked post bankruptcy to $120 Actually I think USG is instructive for another reason. ***after*** emergence from bankruptcy you had plenty of time to buy below $20. My 2 cents at least. WR Grace another CH 11 reorg that worked, but I think these are vanishingly small as a % of situations.
deadspace Posted January 16, 2019 Posted January 16, 2019 Well USG fell back down to $20 years later due to financial issues associated with the financial crisis and their debt - but on the day they declared they were exiting bankruptcy as I recall the stock went from $35 to $80 -- You had opportunity to buy cheaper only after their financial situation started to deteriorate partly due to the debt they took on to pay off the asbestos liability
DRValue Posted January 16, 2019 Author Posted January 16, 2019 this does seem like a good case for a S 365 transfer, and old pg&e remains with proceeds to pay out claims and debt pennies on dollar. plenty of big utilities would love to be a 365 buyer, no? if this is right, stay the eff away Thanks Christian. I'll need to research that one. This is going to be very interesting. I won't be making any moves until I've read a lot of dockets and listened to all the political rhetoric come out.
havingheart Posted January 16, 2019 Posted January 16, 2019 If the insurer is willing to sell the claims at 35c on the dollar, how could the equity be worth anything > 0? My very rudimentary understanding is that equity is always the last in line, so even if the time frame for the claims were stretched out in years, the claims would be more likely to be paid before the equity. I can't imagine insurers being unskilled players in the bankruptcy process. Could we say that the current share price only relies on the odds of political intervention + odds that unsecured creditors would be skipped and a bone would be thrown to shareholders?
Guest cherzeca Posted January 16, 2019 Posted January 16, 2019 this has GM written all over it. sell the assets out to PG&E newco, financed by whoever (and California may be helpful on that side of the transaction), and let PG&E in bankruptcy hash out all of the insurance/creditor claims over the next 5 years. for all I know, the sale proceeds may be quite large in an auction. if I am right, then you don't want to be with oldco, you want to be with newco
DRValue Posted January 16, 2019 Author Posted January 16, 2019 If the insurer is willing to sell the claims at 35c on the dollar, how could the equity be worth anything > 0? My very rudimentary understanding is that equity is always the last in line, so even if the time frame for the claims were stretched out in years, the claims would be more likely to be paid before the equity. I can't imagine insurers being unskilled players in the bankruptcy process. Could we say that the current share price only relies on the odds of political intervention + odds that unsecured creditors would be skipped and a bone would be thrown to shareholders? Sometimes claims are sold, generally (IMO), because of the value of the claim now versus in the future (i.e. time value). Could also be the claim sale gives certainty. But one thing I always remember here is the buyer. Would the buyer of the claim ever pay what its actually worth? My answer is no as they wouldn't make a profit. So there's probably more value than 35c on the dollar for sure.
Sharad Posted January 16, 2019 Posted January 16, 2019 this has GM written all over it. sell the assets out to PG&E newco, financed by whoever (and California may be helpful on that side of the transaction), and let PG&E in bankruptcy hash out all of the insurance/creditor claims over the next 5 years. for all I know, the sale proceeds may be quite large in an auction. if I am right, then you don't want to be with oldco, you want to be with newco I see this more like a Fannie/Freddie situation. The state takes over the entity, prevents bondholders from securing their debts through any renegotiation, sets up a claim for future wildfires via inverse condemnation, and just milks any operating cash flows to pay for corrective action on fixing the infrastructure problems plaguing the entity (also due to terrible zoning by the state). Bondholders would likely see a fraction of face in such a situation (they're unsecured, after all). In any event, I'm lost as to how equity is still sitting at $6...
aws Posted January 16, 2019 Posted January 16, 2019 I just don't see how they are going to come up with an equitable solution in a bankruptcy. The fire victims likely won't get anywhere near full compensation. There's talk of bigger cities like San Francisco wanting to break-up PG&E and take just slices that serve their own region, but if that were allowed there would be no affordable power in the rural regions subject to the fire risk. The current system sucks, where you can be hit with multi-billion dollar litigation even in the event you did nothing wrong because of inverse condemnation (not saying PG&E did nothing wrong, but that's a risk any buyer would have to assume), and the only reason it remotely works is because at least you can spread the risk over millions of ratepayers. Not only do the cities help subsidize the overall cost, but it provides some diversification so at least you have a large enough pool of overall earnings that it's possible to come back from a single disaster. If you broke up PG&E and individual utilities controlled slices, no one with sufficient capital to actually cover the potential damages that could occur would take the risk of providing power to the rural regions. Power would be extremely expensive to those residents and the company that provides it would fold like a lawn chair if there was another fire leaving future victims much less likely to recover than they are now. So if you sell off PG&E piecemeal you will hurt a lot of people outside the major cities. No one will buy the whole mess under the current law. If you change the law or do something to make it possible to own, then maybe you should just go ahead and do that now instead of letting PG&E fail first. A protracted bankruptcy can't be the best solution for anybody.
Spekulatius Posted January 16, 2019 Posted January 16, 2019 The best option for the state is to have PCG going through bankruptcy, lay out the victims from the liquidation proceeds and then change the law. If they change the law now, the state or PCG‘s customers have to pay the damages, which I think makes no sense from the states POV. If the current possibility for litigation stays, the PCG newco will have an issue and will be worth far less, which means far less liquidation proceeds for the victims and difficulty to invest in infrastructure going forward.
Guest cherzeca Posted January 17, 2019 Posted January 17, 2019 this has GM written all over it. sell the assets out to PG&E newco, financed by whoever (and California may be helpful on that side of the transaction), and let PG&E in bankruptcy hash out all of the insurance/creditor claims over the next 5 years. for all I know, the sale proceeds may be quite large in an auction. if I am right, then you don't want to be with oldco, you want to be with newco I see this more like a Fannie/Freddie situation. The state takes over the entity, prevents bondholders from securing their debts through any renegotiation, sets up a claim for future wildfires via inverse condemnation, and just milks any operating cash flows to pay for corrective action on fixing the infrastructure problems plaguing the entity (also due to terrible zoning by the state). Bondholders would likely see a fraction of face in such a situation (they're unsecured, after all). In any event, I'm lost as to how equity is still sitting at $6... except the state has no jurisdiction. this is a federal bankruptcy
Cigarbutt Posted January 17, 2019 Posted January 17, 2019 The best option for the state is to have PCG going through bankruptcy, lay out the victims from the liquidation proceeds and then change the law. If they change the law now, the state or PCG‘s customers have to pay the damages, which I think makes no sense from the states POV. If the current possibility for litigation stays, the PCG newco will have an issue and will be worth formless, which means far less liquidation proceeds for the victims and difficulty to invest in infrastructure going forward. Above in the thread, it was mentioned that PG&E's troubles in the 2001-4 reorg were due to extrinsic causes. However, a strong argument could be made (some pushed hard for that line of thinking) that there were significant intrinsic causes (aggressive acquisition strategy, high leverage, questionable capital allocation for dividends and buyback) leading to filing. Despite very significant internal issues and despite being quite a poor corporate "citizen", PG&E was able to negotiate and influence policymakers to the extent of obtaining very favorable terms for future rate changes: http://articles.latimes.com/2004/apr/13/business/fi-pge13 In addition, the bankruptcy settlement provided that the California Public Utilities Commission establish a “Regulatory Asset” of $2,21B in order to reach investing-grade status and obtain market access for debt, being the equivalent of state (tax payer) funding, to be amortized in PG&E’s electrical retail rates over nine years. In the most recent financial squeeze, the basic underlying question is: who will pay for the wildfires? and I wonder how this may not be redefined at least partly, as consequences of natural disasters, implying taxpayer support to faciliate restoration out of bankruptcy without outages and unreliable electricity services.The regulators may have to try to negotiate increased oversight and commitments to more sustainable and secure infrastructure for the surviving entity. Seems like a reasonable path but the size of the claims is the wild card. A near-certainty conclusion is that electricity rates are about to go much higher in California.
DRValue Posted January 17, 2019 Author Posted January 17, 2019 https://www.forbes.com/sites/greatspeculations/2019/01/16/pges-pending-bankruptcy-opportunity-knocks/#490ad4c11f5c Opinion piece on pcg outcomes. I've also read if pcg is split up there's a potential for rural customer energy to be priced too high as they won't have the urban "subsidy". Smaller entities also won't scale. There was another article yesterday saying pcgs San Francisco office building could be worth 1b+ but I don't know what it's carried at on the balance sheet.
Spekulatius Posted January 17, 2019 Posted January 17, 2019 I've also read if pcg is split up there's a potential for rural customer energy to be priced too high as they won't have the urban "subsidy". Smaller entities also won't scale. Is that so? I know a town next to where I live who bought back their grid from National Grid years ago and they enjoy much lower electricity rates than I do. Their grid also seems to be more reliable, as they had little outages during the snowmaggedon in March 2018 and what went out was quickly repaired. I rented at this time in NG Territory and my Appartement was without power for a week. Maybe just the exception from the rule, but there does seem to be easy to make it a truly local utility work. The town in question is a rural community of roughly 10,000 people.
DRValue Posted January 17, 2019 Author Posted January 17, 2019 I've also read if pcg is split up there's a potential for rural customer energy to be priced too high as they won't have the urban "subsidy". Smaller entities also won't scale. Is that so? I know a town next to where I live who bought back their grid from National Grid years ago and they enjoy much lower electricity rates than I do. Their grid also seems to be more reliable, as they had little outages during the snowmaggedon in March 2018 and what went out was quickly repaired. I rented at this time in NG Territory and my Appartement was without power for a week. Maybe just the exception from the rule, but there does seem to be easy to make it a truly local utility work. The town in question is a rural community of roughly 10,000 people. That's interesting. I'll try and find the reference to the article but they didn't mention sizes of the community. It's good to have opposing information.
LongHaul Posted January 17, 2019 Posted January 17, 2019 Do you know what the following means? KYJ Fraudulent Conveyance DIP Cram Down Stalking Horse Bid Pre-petition vs Post Petition Absolute Priority GUC EC First Day Pleading Sign In Sheet PACER Docket Disclosure Statement Bankruptcy Plan Claim Transfers Chapter 11 vs Chapter 7 Equitable If you don't know most of these terms, maybe you want to stay on the sideline. Thanks for posting this. What are KYJ And EC?
gfp Posted January 17, 2019 Posted January 17, 2019 would assume EC references the Equity Committee but BG will know better
LongHaul Posted January 17, 2019 Posted January 17, 2019 Inverse Condemnation - seems like the elephant in the room. Unless Cali reverses Inverse Condemnation why would I invest in PG&E stock or bonds? Every summer and fall it is like playing a financial version of Russian roulette. There could easily be a $10b - $20b+ liability in many years to come and additional liability where investors get wiped out. I don't like relying on Cali regulators to bail me out either.
Eye4Valu Posted January 17, 2019 Posted January 17, 2019 FWIW, Morningstar believes there is residual equity value post bankruptcy. Price target of $11.
DRValue Posted January 17, 2019 Author Posted January 17, 2019 FWIW, Morningstar believes there is residual equity value post bankruptcy. Price target of $11. We shall see, I think its one to follow.
JRM Posted January 17, 2019 Posted January 17, 2019 FWIW, Morningstar believes there is residual equity value post bankruptcy. Price target of $11. We shall see, I think its one to follow. The problem is instead of investing additional money in line clearing and maintaining equipment they have these distractions to deal with and likely won't be able to get ahead of the curve for maintaining reliable equipment. This is not another BP situation. Hopefully the first question asked is: how do we prevent this from happening again?
walkie518 Posted January 17, 2019 Posted January 17, 2019 Inverse Condemnation - seems like the elephant in the room. Unless Cali reverses Inverse Condemnation why would I invest in PG&E stock or bonds? Every summer and fall it is like playing a financial version of Russian roulette. There could easily be a $10b - $20b+ liability in many years to come and additional liability where investors get wiped out. I don't like relying on Cali regulators to bail me out either. 100% agree here However, if CA doesn't reverse, but bails out PG&E, this might change my opinion on the stock...
DRValue Posted January 18, 2019 Author Posted January 18, 2019 Open letter from Blue Mountain Capital: https://www.bluemountaincapital.com/wp-content/uploads/2019/01/BlueMountain-letter-to-PGE-dated-1.17.19.pdf I don't have a position on the analysis, but it does tie in with my current thinking about this being a liability management exercise to cap claims with leverage, and also that the cash flows will be BP'esque. Also good to know that there would be a shareholder advocate willing to fight, not that my first thought was to buy the equity.
gfp Posted January 18, 2019 Posted January 18, 2019 Still curious on KYG. Is it K as in the common abbreviation for "contract"? Is this some type of contract that was entered into with misidentified or mistaken identity of the parties? do tell Do you know what the following means? KYJ Fraudulent Conveyance DIP Cram Down Stalking Horse Bid Pre-petition vs Post Petition Absolute Priority GUC EC First Day Pleading Sign In Sheet PACER Docket Disclosure Statement Bankruptcy Plan Claim Transfers Chapter 11 vs Chapter 7 Equitable If you don't know most of these terms, maybe you want to stay on the sideline. Thanks for posting this. What are KYJ And EC?
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