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PG&E Bailout Hopes Are Crushed With California Showing Little Interest

Stock MarketsJan 14, 2019 09:00PM ET
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2/2 © Bloomberg. Demonstrators protesting PG&E walk towards the company's headquarters in San Francisco on Dec. 11, 2018. Photographer: David Paul Morris/Bloomberg 2/2

(Bloomberg) -- For days, California Governor Gavin Newsom and lawmakers deflected questions about what they’d do to keep the state’s largest utility, PG&E Corp., from going under. On Monday, their response became clear: Not much -- at least not until the power giant has actually gone bankrupt.

Once the San Francisco-based company has made a Chapter 11 filing -- in what’s likely to be one of the largest utility bankruptcies of all time -- California can jump into the case as a party and wield its power as one of the few entities that must sign off on the company’s final plan to emerge. That leaves room for Newsom to still carry heavy weight in the outcome.

The new Democratic governor made at least one thing clear in his statement Monday: He plans to keep California on track to “make progress toward our climate goals” even as PG&E takes steps to address its $30 billion in potential wildfire liabilities.

The filing, viewed by some as the worst outcome, may actually help California decide what type of utility is right for a state with an ever-increasing risk of multibillion-dollar wildfires, according to Severin Borenstein, an energy economist at the University of California, Berkeley. Options such as breaking up the utility giant or turning it into government-owned entities are likely to be hashed out in concert with the bankruptcy proceeding, he said.

“It will accelerate the discussion that was being had before bankruptcy, which is what is the appropriate structure of utilities given the increased wildfire risk?” Borenstein said in an interview. “If we are going to have investor-owned utilities, how do we deal with the fact that they may face multibillion liabilities?”

Deteriorating Finances

Newsom and other lawmakers showed little interest in bailing out the beleaguered company after it said it plans to file for bankruptcy on or around Jan. 29. The company determined a bankruptcy filing was “the only viable option” to deal with its deteriorating finances after discussions with state officials, Steven Malnight, senior vice president of energy supply and policy at PG&E’s utility unit, said in an interview.

A bankruptcy reorganization would allow PG&E to operate and keep the lights on as a court considers a restructuring that could save it.

And it would do something else. “It diversifies the responsibility for what plays out,” said Kit Konolige, a senior analyst with Bloomberg Intelligence.

“So far, I would say the politicians have been very successful to avoid being the bad guy,” he said. “Clearly the one in the barrel is the utility. What politician is going to step up and say ‘I want to save PG&E?’”

At the moment, not many. It’s unlikely, though, that the pressure will be off Newsom and the legislature to act. Chapter 11 gives creditors, the company and other stakeholders room to negotiate and the state is surely one of those, said Stephen Nielander, adjunct lecturer at San Diego State University.

“You’re really talking about a vital interest asset,” Nielander said. The state has “a vested interest in our citizens being covered and protected. Does that get them a seat at the table? It’s hard to imagine that they’re not.”

It may also pave the way for change in California’s relationship with its power companies. Betty Yee, the state’s controller, said PG&E’s move “underscores the reality that the state cannot regulate utilities as we have for the last 100 years.”

“We need to comprehensively assess our electricity infrastructure and create solutions that ensure reliable service, the utmost safety and rigorous ratepayer protections to mitigate further impacts on our state’s economy,” Yee said in a Twitter post.

The California Public Utilities Commission said it was closely monitoring PG&E, as are the governor’s office and state agencies. The commission would have to sign off on any rate increases or changes required to help the company exit a bankruptcy so would be part of any proceedings.

‘Sufficient Resources’

“At this point, PG&E has sufficient resources to continue to safely meet its core responsibilities and obligations,” Terrie Prosper, a CPUC spokeswoman, said in an emailed statement.PG&E employs 20,000 people and provides power to more than 15 million. Its liabilities could grow from wildfires in 2017 and 2018. The California Department of Forestry and Fire Protection has blamed 17 of the 2017 blazes in part on company power lines and other equipment.

Its stock has tanked, and it has little left in the bank -- $1.5 billion in cash and cash equivalents as of Friday. PG&E has said it doesn’t intend to make an interest payment of about $21.6 million due Tuesday on 5.4 percent senior notes due in 2040.

“There isn’t a lot of time left,” said Shahriar Pourreza, a Guggenheim analyst. “You’re talking six months until you actually get into a liquidity crunch.”

Even if they wanted to, Newsom and legislators might simply be unable to do anything in time.

“The high degree of controversy and public outcry stemming from wildfire damages and perceived blame assigned to PG&E likely creates headwinds in the legislative process,” the research firm ClearView Energy Partners LLC said in a report Monday. “The 15-day notice offers a very short runway for lawmakers to act.”

PG&E on Sunday started searching for a new chief executive officer after Geisha Williams (NYSE:WMB), 57, quit; general counsel John Simon will take the helm in the meantime.

Bonds that traded above face value about two months ago posted steep drops. The stock fell 52 percent to $8.38 a share New York, its biggest one-day drop since 1980. Shares are down more than 80 percent since the Camp Fire, the deadliest blaze in state history, broke out Nov. 8.

PG&E Bailout Hopes Are Crushed With California Showing Little Interest
 

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