PG&E Corporation (NYSE: PCG) rallied another 1.4% on Tuesday, and the stock is now up more than 50% from its January lows as investors grow increasingly confident that the company’s bankruptcy filing earlier this year will not wipe them out.
On Tuesday, PG&E bondholders filed a new financial proposal for exiting bankruptcy that serves as an alternative to the plan the company is working on.
A Unique Bankruptcy
PG&E’s decision to file for bankruptcy came as the company faced roughly $30 billion in potential liabilities related to California wildfires in 2017 and 2018.
Given that the company has an obligation to keep the lights on for California residents, PG&E had limited options for paying its near-term utility operations and also covering sudden wildfire liabilities.
As a result, PG&E had a liquidity crisis, even though the value of the company’s assets more than covered the amount of its liabilities — a unique situation for a company in bankruptcy.
The bondholders’ plan includes renaming PG&E “Golden State Power Light & Gas Co.”; appointing a new board and new management team; selling $1 billion in real estate assets; setting aside $18 billion to a trust dedicated to past wildfire claims; and committing $4 billion to a statewide fund committed to future wildfire claims.
Gov. Gavin Newsom proposed the California liability fund and said utilities would need to spend $3 billion on wildfire safety measures to qualify.
The Path Forward
The PG&E bondholder plan would be funded by $18 billion in cash from the group of investors, $2.2 billion in insurance payouts and $9.5 billion in new debt.
The bondholder proposal comes after PG&E has dragged its feet on unveiling its own plan to emerge from bankruptcy.
Last week, Bloomberg reported PG&E is planning a $14-billion compensation fund for people impacted by the wildfires and is considering a potential $31-billion restructuring plan.
Earlier this month, PG&E announced a $415-million wildfire liability settlement with the city of Napa as part of its bankruptcy plan. The company may be waiting for the state of California to potentially change its inverse condemnation laws, a topic of debate for the state after 2017 and 2018 wildfires left utilities like PG&E in dire financial straits.
PG&E has until Sept. 26 to file an official bankruptcy plan with the courts, but the bond investors responsible for the alternative plan — including Pacific Investment Management Co., Elliott Management Corp. and Davidson Kempner Capital Management — hope their plan can allow the company to emerge from bankruptcy before the end of 2019.
An Expert Take
Earlier this year, Robin Deshayes, president and chief strategy officer of Miltonian Capital Management, told Benzinga that California and its utilities need to agree on a solution moving forward that reduces the possibility that every major wildfire in the state creates a financial crisis for utility companies.
“If these utilities don’t have access to the debt markets, they can’t finance their operations,” she said.
While California sorts out its mess, Deshayes said PG&E’s stock will serve primarily as a risky, volatile trading vehicle that reacts to the latest headlines.
Investors who held the stock at $48 when it was a stable utility paying a nice dividend shouldn’t expect a $48 share price or a dividend to return anytime soon, Deshayes said.
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A PG&E yard in San Francisco. Photo by Peter Merholz via Wikimedia.
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