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PG&E - Potential Bankruptcy


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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.

2 comments:

 

1-Your post reminded me of the 2008 TARP bailout. From Mr. Buffett: "If I didn't think the government was going to act, I would not be doing anything this week," (after investing $5 billion in Goldman Sachs) "I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly." A cynic may say that Mr. Buffett was a contributor in an interesting triangle with the Treasury (who himself happened to be linked with the previous employer) but anybody could tag along if they felt that "the best thing to do" was the best of the worst options {at that time}.

 

2-The Russian roulette is an odds game. Interesting to note that a way to prevent wildfires (and there will be a lot of discussion about that during the negotiation process, in terms future costs), in some places, has been to apply "prescribed" burning as a useful way to prevent wildfires in future years and I would say that nature, in the last two years, may have contributed to lower odds of wildfires in the future, at least in certain areas.

 

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

...

What are KYJ And EC?

Hoping for input from BG2008 but KYJ may mean Know Your Jurisdiction or Know Your (Thy) Judge. If I'm right, KYJ indicates that the outcome of the restructuring may go beyond what the financial calculator shows and may involve contextual specialized knowledge and even character assessment.

 

For EC, environmental claims or compliance?

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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?

 

KYJ - Know Your Judge 

EC - Equity Committee

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https://www.bloomberg.com/news/articles/2019-01-16/lone-pg-e-bull-refuses-to-ditch-buy-rating-after-80-wipeout

 

"Miller argues that regulators are already creating a so-called stress test that will limit the company’s liabilities from 2017 wildfires. He also notes that government officials including California Governor Gavin Newsom have said they want healthy, investor-owned utilities. What’s more, the company’s financially strong gas and power transmission business must have an “equity layer” if they are going to have access to capital, he said."

 

I hope it plummets after they file (assuming they definitely do). Unfortunately I don't have a great deal of time right now to do some real analysis, and money is tied up... C'mon, Otting!

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A thought here. To the best of my knowledge, the current law is that if a utility in California somehow causes a wildfire, even if it wasn't negligent, then it is liable.

 

If Shareholders and bondholders are sacrificed here, won't that push up the cost of debt etc. to all other utilities? Won't capital stay away?

 

Even if the companies do everything they have to, I could face a total wipe out as an investor if there is some event.

 

Starting to think about those cumulative non-redeemable preferred. There's a lot more to do here and more to hear, but I'm interested. Time to read those annual reports, prospectuses, court cases, and deep dive into the politics and financial implications of this.

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"However, California is one of the only states in the country in which courts have applied inverse condemnation to events caused by utility equipment. This means that if a utility's equipment is found to have been a substantial cause of the damage in an event such as a wildfire - even if the utility has followed established inspection and safety rules - the utility may still be liable for property damages and attorneys' fees associated with that event."

 

That is absolutely crazy! This liability needs to shift to the provider of the equipment.

 

Any precedents of this law being used previously? Seems unfair to me. I believe its new, I wonder if they could work something out or amend it?

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Given rising wildfires costs, as well as legal and regulatory uncertainty, an interesting transition point has been reached.

 

You may be interested in reviewing what is happening to Sempra Energy’s San Diego Gas & Electric utility who tried to have customers pay $379 million for 2007 wildfire liabilities. The case is going to the California Supreme Court. In essence, the inverse condemnation rule (strict liability regime) was applied by the courts and the regulatory body refused to let the utility pass on the costs to the rate payers because of the “prudent manager standard”. The courts basically said that they have to apply the law and rely on the regulator to spread the cost to rate payers and the regulators said that they have to act prudently and that the law should be changed…

 

The inverse condemnation rule reflects the tension between many doctrines and makes sense when you think of public agencies needing to share private space for public good while exposing the private property to damage and relying on a mechanism to share the costs of those risks with the “community” that benefits from the resulting services. The issue in California is the stringent application of this rule for investor-owned utilities. Entities such as PG&E are, in a sense, quasi-public entities and the application of the rule may potentially make sense to incentivize investments for fire prevention but recent events show that the system is broken. The outcome for PG&E seems to be related to the resolution of this conflict. The law can change but the process is likely to be contentious and long, perhaps explaining the need to consider formal restructuring. Parallel developments at the California Public Utilities Commission to relax rules allowing the transfer of costs to rate payers appear to be more promising but recent decisions have not been favorable. California is at a point where large investments are contemplated in energy and, for private partners to play a role (quantity of capital and cost of capital), clearer guidelines need to be established for prevention investments, exposure to wildfire liabilities and fair/reasonable ways to “share” the costs.

 

Wildfire costs have risen and a significant part of this rise has been linked to significant housing developments (property values) in at-risk areas (wild land-urban interface) with present regulations not allowing for clear electricity price signals in these same areas and with state-mandated insurance plans when the private market cannot supply cheap enough coverage (responsibility sharing needs to be redefined with state and local government as well as property owners). There's more to it than raking, cleaning or hiring private firefighters to save celebrities' burning homes.

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A little research goes a long way ...

 

Natural disaster is part of the everyday risk of operating an electric generation facility, and when something happens; the facility does not get to 'cap', or 'escape' its obligations. We just don't want to recognize that facilities self-insure against their total capital, plus any relevant insurance that they may have purchased. If the worst happens (very remote chance), the facility burns through its proceeds - and if it still isn't enough, the public is on the hook for the difference.

 

Remember Fukashima? 7 years later Japan/TEPCO is still stuck with it.

https://en.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_disaster

https://www.npr.org/2018/12/26/680175363/executives-in-fukushima-nuclear-disaster-deserve-5-year-prison-terms-prosecutors

 

The US West Coast lies on a well-known fault line, and most 'seismic science' suggests that an event is overdue. Most would expect that there is going to be more of this, it will occurr with increasing frequency, and that it is going to create a hard market for all west coast 'global warming','earthquake', and 'seismic' insurance. And the public sector will willingly spread the risk, through wide-spread purchase of super-cat insurance.

 

And what do super-cat insurers do when the worst happens? - they bankrupt, pay out cents on every dollar of their obligations, and report great earnings up until the worst happens, if it ever happens. Appear to look remarkably similar to PG&E!

 

What's the better investment?

Getting involved with the bankruptcy, or getting involved with the insurers providing the insurance?

 

Different strokes.

 

SD

 

 

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The Fukushima disaster raised questions about governance (regulatory and government) and it became clear that regulatory capture had become a revolving-door norm. When black swan events hit, it tends to get messy and the populace want to assemble in front of burnings at the stake. It looks though that real blame needed to be attributed. However concerning the failures (before, during and after the Japan disaster), this is not Tchernobyl in 1986, that eventually had more to do than Perestroika and Glassnost in precipitating the Soviet Union downfall.

 

Similar issues are at work in California and some have been quite vocal about it but also have an agenda($).

https://media.sandiegoreader.com/news/documents/2017/11/30/CPUC_Malfeasance_Report_Update_10_Nov_2017.pdf

 

FWIW, I think Japan and the US, in general, continue to have reasonably good governance. Both continue to score high, on a comparative basis, on the regulatory competence and control of corruption fronts.

 

Hoping for a fair and reasonable outcome for PG&E means that one expects that cooler heads will prevail and that key participants will be able to see the forest for the trees during the temporary and more than usual transparent period that they are about to go through.

 

And yes, the Big One will happen one day but San Francisco is such a great place (for some of the population).

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My argument in essence is that you can't pass a law to make companies liable no matter what and then not let them work themselves out of it. If the liabilities are simply too great then the government has to step in. In that scenario what benefit is there to letting pg&e fail? It just increase government liability.

 

Me thinks more regulation / changed best practices, an insurance fund, and process if this happens again should be enough. And if the politicians really want to, they can wipe out the common stock. But what's the point? The company may be at fault under the strict letter of the law, but it's practices could've been reasonable. 

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In terms of the need for the government to "step in", when thinking of the Lehman event, powers that be supported Bear Stearns, AIG, the GSEs but drew a line with Lehman. Why? "They" said that legal authority was lacking and decided that the collateral was too risky but, especially in retrospect, an argument could be made that the decision was much more political than economic.

 

I agree with the line of thinking but PG&E has a checkered past and the Californian case law for investor-owned utilities exposure to inverse condemnation is extensive, is based on the constitutional definition for the exercise of eminent domain and these legal trajectories can show tremendous inertia.

 

https://www.npr.org/sections/thetwo-way/2015/04/09/398571726/pg-e-hit-with-1-6-billion-penalty-for-2010-calif-pipeline-explosion

https://www.mercurynews.com/2017/01/26/pge-gets-maximum-sentence-for-san-bruno-crimes/

http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M250/K897/250897740.PDF

 

https://law.justia.com/cases/california/court-of-appeal/4th/74/744.html

 

Odds evaluation along the capital structure is challenging because 1-the defining variable is political, 2-PG&E has been a quite poor corporate citizen in the public arena, 3-the wildfire recurrent episodes that bring public scrutiny have large price tags and 4-of the fact that PG&E considering filing constitutes a signal that they are getting negative messages from legislators and regulators or at least perceive difficult negotiations.

 

PG&E have to show that they were competent and prudent. :-\

I understand that the powers that be will look at alternative models such as the cooperative business model and members can achieve low rates and perhaps (evidence?) better risk management but low electricity rates rest on various public loans, subsidies and grants and PG&E is the major player with scale. So, what's the point?

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Make a company liable no matter what, and you place the inherent 'moral hazard' of the business on the board of that company. The vast bulk of everyday mishaps (spills, leaks, pollution, etc.) can be well handled within the arrangement, there is a single point of responsibility and governance (the board), and 'board' insurance is both common and wide-spread.

 

What remains is 'cat' risk, and its severity is measured in 'degrees' of extreme. Ultimately its covered through a mix of super-cat and self-insurance that you and I pay for, as and when it occurrs. If we did not do that, neither of us could afford the full cost of the electricity that the facility generates. The existing entity turns into a 'zombie', and debate as to 'what should be done' - goes on for literally years.

 

The fundamental problem is that energy is not sold on the basis of full cost, it is sold on the basis of marginal cost, and we pay for the mismatch through volatility. The envirionmentalist arguing that cost should include environmental impairment (pollution, warming, health, etc.), and the producer arguing that it's just the cost of production.

 

Point is, there is going to be more of this over time ...

PG&E is unlikely to be an isolated incident.

 

SD

 

 

 

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@Cigarbutt

 

I agree with everything you said.

I'm going to start thinking of scenarios of how this will play out and document the pros and cons.

But the more I think about it, I can't shake that the easiest thing here is help PG&E rather than hinder them.

 

Lets say worst case is that the company's assets are bought out of bankruptcy, I don't think any company would assume the liabilities. That means it falls on the Government. If the liabilities were assumed, then why couldn't PG&E manage them the same way that the other companies would?

 

I have also seen that PG&E have to demonstrate they are in dire straits before the government will step in. Bankruptcy pretty much demonstrates that to me.

 

I'm also thinking that they have 16m customers. Let's say they have liabilities of $30b and issue a 5% 5 year amortizing bond. Spread that over the customer base and that's an extra $35 a month on the bill. Not nice, but shouldn't be too painful.

 

It might only be the commons that end up being a sacrificial lamb, but i might have a nibble if i get involved in the rest of the capital structure.

 

 

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Point is, there is going to be more of this over time ...

PG&E is unlikely to be an isolated incident.

 

SD

 

This. If there is more of this coming, the Government has to legislate reasonably and responsibly or the whole thing fails. I know PG&E has demonstrable failings and I believe the shareholders will be punished at least a little, but this is a new paradigm to be regulated / legislated for.

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Point is, there is going to be more of this over time ...

PG&E is unlikely to be an isolated incident.

 

SD

 

This. If there is more of this coming, the Government has to legislate reasonably and responsibly or the whole thing fails. I know PG&E has demonstrable failings and I believe the shareholders will be punished at least a little, but this is a new paradigm to be regulated / legislated for.

 

The structure already exists and does not require legislation.

 

1) Assets sold to a new entity. New entity supplies existing customers. Business continues as normal.

2) Old entity manages the liabilities in a wind-up.

3) Public covers anything in excess (bonds & equity at zero)

 

If you believe the fire liability is less than PG&E's total current debt and equity, there's something left over for you.

If you think the public 'is going to pay', then all existing debt and equity must be zero.

 

SD

 

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Point is, there is going to be more of this over time ...

PG&E is unlikely to be an isolated incident.

 

SD

 

This. If there is more of this coming, the Government has to legislate reasonably and responsibly or the whole thing fails. I know PG&E has demonstrable failings and I believe the shareholders will be punished at least a little, but this is a new paradigm to be regulated / legislated for.

 

The structure already exists and does not require legislation.

 

1) Assets sold to a new entity. New entity supplies existing customers. Business continues as normal.

2) Old entity manages the liabilities in a wind-up.

3) Public covers anything in excess (bonds & equity at zero)

 

If you believe the fire liability is less than PG&E's total current debt and equity, there's something left over for you.

If you think the public 'is gloing to pay', then all existing debt and equity must be zero.

 

SD

 

I guess I don't think its politically palatable for the  public to pay, and the easiest way to avoid that is either the PG&E of today or a restructured PG&E with equitized debt and a common wipe-out.

 

Looking at the latest 10Q, assuming PP&E are bought at 50c on the dollar that raises $28b. I have no idea how much utility assets could be sold for, but imagine 50c could be too low as their relatively easy to value. The trouble is I have read that claimants would be equal to bond holders, so I don't know how that would affect any recovery for the bonds.

 

I can also imagine bond holders whispering in the ear of politicians for at least some form of recovery. I'll try and find some examples where utility bonds have been totally wiped out without equity recovery. That reputation for utilities being boring and safe will go up in smoke if California kills PG&E.

 

Does anyone else think there is anything here btw? I'm OK with criticism etc. as it may save me from some losses, but havent heard any bull comments at all yet. Perhaps its too early in the process...

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DIP financing secured.

Some posters above suggested that the newco securities may constitute better entry points. I'm not so sure.

 

Recently, AEP Texas filed to regulators recovery measures to restore transmission and distribution assets that were damaged after Hurricane Harvey. One of the tools suggested was securitization of "restoration bonds" (similar to rate-recovery bonds used in California in conceptually similar circumstances in the past, for PG&E and others) with bonds backed by surcharges to customers.

 

At this point, the best comparables may be the following two:

 

1-PG&E during 2001-4 where the entity (bonds and equity) emerged with new bonds but old bonds and old equity maintained.

 

2-El Paso Electric (Texas) that went under from 1992-6. In that case, secured had 100% recovery and unsecured had 85% recovery. Preferreds got 12% of the new prefs and common shareholders got 3% of the new common shares.

 

The 2019 PG&E seems to fit between the two and maybe closer to 1-.

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Guest cherzeca

this is a good discussion of possibilities, and they range from some equity value to some debt value to don't touch with a 10 foot pole.  this will be a firestorm is bk court as well, and until we know what California wants to do, I don't think this case is investable

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I've read liabilities up to $17b. If camp fire is larger, say $20b, then with insurance and asset sales ($15.8b for gas network, San Fran office and insurance) that could leave only $4.2b to find. Whether the assets get that value in bankruptcy i don't know. I suspect they won't file but I could be a buyer if they do.

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https://amp.businessinsider.com/pge-stock-price-plans-to-seek-bankruptcy-protection-report-2019-1

 

"Recall that the doctrine of Inverse Condemnation (IC) calls for the utility to pay for all liabilities for fires started by its equipment whether it was negligent or not," the analysts Shelby Tucker and Wojciech Majerczak wrote. "Even if it is allowed to recover these liabilities, PacGas might find financing these claims too onerous prior to receiving appropriate recovery guarantees by the California commission."

 

Bankruptcy to cap and finance claims. Hoping it falls when they file.

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