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Jan 7, 2019

PG&E plummets after bankruptcy talk stirs concern, suspicion

Pacific Gas & Electric Co. (PG&E) workers repair a transformer in Paradise, California, U.S., on Thursday, Nov. 15, 2018.

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In weighing a bankruptcy filing, PG&E Corp. officials -- whether intentionally or not -- are putting the pressure on California legislators to bail them out. It’s a dangerous game, though, as Monday’s market reaction showed.

The utility’s stock fell as much as 26 per cent while prices on its 6.05 per cent notes due in 2034 fell 2.8 per cent. The bonds are now the most active in the investment-grade market.

The company is considering whether to file for bankruptcy as soon as February to protect itself over billions of dollars of potential wildfire liabilities, people familiar with the situation said late Friday, asking not to be identified because the information isn’t public. Two analysts called the idea an “exploitive” tactic that won’t help PG&E’s profile.

PG&E declined to comment, saying it doesn’t speak about “market rumor or speculation.”

The San Francisco-based company has lost more than half its market value since the deadliest wildfire in California history broke out in early November. The California Department of Forestry and Fire Protection, called Cal Fire, is investigating PG&E wires as a possible source of the blaze. And that’s compounding financial woes the company was already facing after other fires destroyed parts of wine country a year earlier.

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Some analysts said the stock reaction may be overblown.

“The market is overreacting to bankruptcy concerns given the public statements we’ve heard from regulators and politicians,” Travis Miller, a Chicago-based analyst at Morningstar Inc., said in an interview Monday. “Bankruptcy has been on the table for many months, if not years.”

And Daniel Ford of UBS Group AG on Monday raised his 12-month price target for PG&E to US$29 from US$26, based on recent disclosures by the company asserting it is not responsible for the 2017 Tubbs fire, the second-most destructive in state history. The state has yet to issue a report determining the cause of that blaze.

“Our US$29 target does not assume anything for Tubbs” liabilities, he said in a research note Monday. The shares were down 22 per cent to US$19.04 at 2:28 p.m. New York.

The issue is coming to a head as incoming Governor Gavin Newsom takes office and the state legislature reconvenes Monday. There have been some signs that PG&E would get relief in one form or another.

In November, California Assemblyman Chris Holden said a bill would be introduced in January to help PG&E absorb potential liabilities from the latest wildfires. It would extend legislation that allows PG&E to issue bonds to pay off the costs tied to the 2017 blazes.

California Public Utilities Commission chief Michael Picker said that same month that he couldn’t imagine allowing the state’s largest utility to go into bankruptcy. His agency later began a formal process to evaluate whether to break up or take over PG&E’s Pacific Gas and Electric utility.

State Senator Jerry Hill, an outspoken PG&E critic, said the utility previously raised bankruptcy as leverage when seeking state assistance in paying its liabilities from wildfires in 2017. The company could be engaged in similar brinkmanship now, he said.

“You can’t trust what they say,” said Hill, who represents San Bruno, where a PG&E gas pipeline exploded in 2010, killing eight. “Last year, they were able to fool the legislature with the narrative of bankruptcy or bailout, and the legislature gave them a bailout.”

Still, a potential bankruptcy may be enough to force the hand of state legislators. They’ll have to decide whether to allow the company to pass some of the costs of the fire through to taxpayers, Katie Bays and Clayton Allen, analysts at Height Securities LLC, said in a note on Monday.

Bankruptcy “should be considered a credible risk by shareholders,” they said. But they added that “exploitive tactics and a reticence toward change will not improve” the company’s profile.

‘Working Diligently’

In a statement late Friday, PG&E said it’s “working diligently to assess the company’s potential liabilities as a result of the wildfires and the options for addressing those liabilities. We recognize the need to balance the interests of many stakeholders while maintaining safe, reliable, and affordable services for our customers, which is always our top priority.”

Earlier on Friday, PG&E said in a statement that it’s already weighing changes to both its board and how its businesses are structured. One option under consideration: Selling its natural gas business after a bankruptcy filing, the people familiar with the matter said.

The prospect of a state takeover may not offer a panacea, Bloomberg Intelligence analyst Kit Konolige said.

“Breaking it up or the state running the company, those are all incredibly complicated proposals that just have no indication that they would be successful, certainly not anytime soon,” he said. “The assumption that whatever you put in place of PG&E would be better -- that’s really unproven.”