PG&E - Potential Bankruptcy

[Cigarbutt]

The San Francisco Bay area may feel some its warmest temperature ever this weekend and PG&E, despite being bankrupt, remains deeply involved until proven otherwise and new claimants would tend to build a higher priority through an already complicated resurgence plan.

[Cigarbutt]

Today, nationalization risk played out as mayors raised the customer-owned specter right after the governor threatened a more active role during the restructuring. I hear Spekulatius' opinion about the relative advantages of mutually-owned utilities and, in the last few days, have experienced (positively even if the outage touched my household) how a publicly-owned electric utility can efficiently face adverse and unexpected weather-related developments (more than 10% of people in my province had an electrical outage for some time) but there are significant downsides to public ownership and I continue to think that the public ownership model is unlikely to spread in California. From an opportunistic point of view, it is just too bad that nationalization risk did not exactly conjugate with recent fire activity risk.

 

Apart from the nationalization component, bankruptcy risk is strongly related to regulatory risk. This may be too optimistic but the assumption is that the different and relevant authorities with skin in the game will come together to share the risk and to allow an adequate return on capital invested by private inputs in this new normal environment.

 

An example below from the insurance world showing that there may be a realization that the causes behind the recently recognized hardship are multiple. California is special because of the inverse condemnation doctrine but it has applied wrong incentives with the incredibly significant development of property value at risk exposed to wildfires. The application of new building codes is also necessary. Poor incentives have also built up through poor insurance regulation policies.

https://www.iii.org/sites/default/files/docs/pdf/fighting_wildfires_with_innovation_wp_110419.pdf

 

There are many options to fund the potential risk outcomes associated with the new reality such as catastrophe bonds and state-sponsored recovery bonds.

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Financing-Third-Party-Wildfire-Damages.pdf

 

Edit: I forgot to mention the role of the goats but this is covered elsewhere in another thread.

[Cigarbutt]

This remains very complex but the BK pretty much evolved in a typical way, at least so far.

 

Risks:

-nationalization risk

-bankruptcy risk

-more wildfire risk

 

Late last week, there was an agreement reached for wildfire claims (13.5B). Together with the previous resolution of state and insurance claims (1B + 11B), I would say a significant layer of uncertainty has been removed and the likelihood that oldco (old equity) comes out favorably, given the remaining risks, may now get recognized.

 

Old PCG needs to come out with a reorg plan with a deadline fixed in Q2 2020.

Assumptions:

-old equity 'pays' for the after-tax total claims of the past

-post BK equity valuation at 22-24B, similar to end 2017

-need to raise 17B in new equity

-debt raised for future wildfire costs as part of a future effort, rate-backed and state-backstopped

 

So "value' about 10 to 13 per share. It looks like the price may rise to this reasonably conservative range in the short term.

 

NB This is, in large part, an exercise in liability discounting. One liability was easier to discount:

https://www.marketwatch.com/story/was-a-280-million-emerald-destroyed-in-california-wildfire-pge-is-dubious-2019-11-19?siteid=rss&rss=1

[Cigarbutt]

The latest 'agreement' dealing with individual wildfire claims was felt by some (some Seeking Alpha contributors and some others) to lessen the pressure on the equity backstop reported last September.

http://s1.q4cdn.com/880135780/files/doc_downloads/wildfire_updates/2019/09/2019.09.17_Plan-Financing-Summary_FINAL.pdf

 

The agreement, simplified, implied 6.75B to victims in installments ending in early 2022 and 6.75B in company stock that would result in a significant stake in the 'reorganized' PG&E.

 

Gov. Newsom, after a solicited debtor request from the party looking for a nod of approval, gave the following answer:

https://htv-prod-media.s3.amazonaws.com/files/letter-from-governor-newsom-12-13-19-1576295434.pdf

 

This remains complex++ and anything can happen but the Governor is, in a simplified form, asking for a more significant commitment (governance and new equity).

 

There may be another interesting entry point if PG&E does not respond fast enough or in an unconvincing way. It seems to me that PG&E is positioned to deliver a reasonably sufficient message (more essential governance change, more 'new' equity commitment in order to have a less leveraged phoenix entity and perhaps a specific equity commitment for the wildfire fund to come that will deal with future costs). I keep my baseline requirement for +/- 17B in new equity.

 

IMO, there continues to be a window of opportunity for a white knight such as BRK energy who could supply sufficient equity capital, management capacity, governance reassurance and long-term stability for cost of capital not even considering the reinsurance expertise that will play an increasing role going forward, given the wildfire context and the inverse condemnation rule.

 

I understand the Governor's tone, given the noise at the constituency level but the public authorities have to get their act together and it is difficult to explain how the insurance department does not seem to understand that they are more a part of the problem than a part of the solution:

https://ktla.com/2019/12/13/insurance-plan-fights-california-commissioners-push-to-offer-homeowners-state-wildfire-coverage/

Unrecognized costs remain so qualified until the forces of nature start to send invoices.

It looks like old PG&E will 'pay' perhaps more than its 'fair' share of 'natural' costs due to its bad-boy and rogue behavior and attitude and it may recapture some of these costs over time but the state needs to remember that they can't have their cake and eat it too.

I would say the bankruptcy is likely to discover the best outcome but an adult in the room would help.