(Bloomberg Opinion) -- What is the anteroom to Chapter 11? Chapter 10½? In any case, that’s where PG&E Corp. has taken a pew.
In theory, that could be as far as the California utility goes. The notice of its intention to file for bankruptcy protection around the end of the month starts a clock ticking on a 15-day advance notice period required by state law. Something may yet happen to keep the company out of the court.
That something is largely personified in new Governor Gavin Newsom. Facing perhaps $30 billion of liabilities arising from wildfires in 2017 and 2018, PG&E is effectively a ward of the state. It has an enterprise value of about $28 billion – and that was before its shares tumbled again on Monday morning after the notice had been filed (it’s down to less than $24 billion as of writing this). All the routes back to some semblance of faith from capital markets run through Sacramento, be it a cap on liabilities, permission to securitize debt, or even just an unambiguous show of support. PG&E’s stock is effectively an option on California politics, which is as scary as it sounds.
And those politics aren’t running PG&E’s way. There is understandable anger at the company (see this webcast of last Thursday’s meeting of the California Public Utilities Commission for a taste). The abrupt departure of CEO Geisha Williams on Sunday, coming soon after some other senior managers were let go and PG&E announced a sweeping corporate review, looks like another attempt to appease public opinion.
Yet Newsom’s short statement Monday morning looked ambivalent at best. Essentially, his office notes the bankruptcy filing but emphasizes that, whatever happens, he’s focused on keeping the lights on, getting wildfire victims their due, and maintaining California’s climate goals.
Bankruptcy for a utility of this scale, facing ongoing chronic risk of wildfires, raises unknowns of its own, especially in terms of the potentially clashing powers of the regulator and the judge and, ultimately, higher financing costs borne by ratepayers. Politically, on the other hand, it also offers a new governor the prospect of drawing a line under events that preceded him and then working with the legislature on a root-and-branch reorganization of northern California’s grid (along with, hopefully, associated issues of land and forestry management and insurance). It should be remembered that, whatever happens, chronic wildfire risk means the state now faces a large and ongoing cost in terms of strengthening its power grid and dealing with future disasters. Finding the most palatable way to put that in front of ratepayers (and maybe taxpayers) will require some extraordinarily creative political maneuvering.
This is, of course, all speculative (the stock’s an option, remember?). Still, the timing of PG&E’s filing, coming alongside Williams’s sudden exit, suggests political support for keeping the company out of bankruptcy has waned. In its filing, PG&E notes it had about $1.5 billion of liquidity as of Friday. While it isn’t entirely clear, that figure is presumably net of the $800 million the company would have posted as collateral as a result of last week’s credit-rating downgrades. If so, PG&E certainly had enough to make the $21.6 million interest payment due on Tuesday and probably had enough to keep going for several more quarters. Greg Gordon, analyst at Evercore ISI, estimates PG&E’s negative free cash flow and scheduled debt repayments would eat roughly another $1 billion by the end of the year.
On that basis, the decision to pull the trigger now suggests PG&E doesn’t expect state support to be forthcoming in time, and is perhaps starting the process in a Hail Mary effort to get it. Judging from the market’s reaction, there’s little expectation of that being answered.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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