A PG&E Bankruptcy May Be What California Needs for a Utility Fix

(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. 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 U.S. utility bankruptcies of all time -- California can wield its power as one of the few entities that must sign off on a reorganization plan. That leaves room for Newsom to weigh in on the outcome. PG&E shares fell as much as 40 percent early Tuesday, and trading was briefly halted.

The new Democratic governor said he wants safety, reliability and affordability for Californians, even as PG&E takes steps to address its $30 billion in potential wildfire liabilities. In a statement earlier that day, he also keyed in on a top priority: keeping the state on track to “make progress toward our climate goals.”

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. “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. PG&E determined a bankruptcy filing was “the only viable option” to manage its deteriorating finances, 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 plan to 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. “What politician is going to step up and say, ‘I want to save PG&E?’”

If PG&E goes bankrupt as expected, it will be the first investment-grade name to default without entering the U.S. high-yield market since MF Global Ltd. in 2011, Bank of America analysts said in a research note.

At the press conference late Monday, Newsom characterized PG&E’s woes as vastly different than those that led its utility unit to go bankrupt in 2001. “We are not in an energy crisis,” he said.

He said all options are on the table for the company and called for changes at PG&E’s board, “There’s plenty we can do to influence” decisions, he said.

Early Tuesday, the company announced that Roger H. Kimmel stepped down Monday as a director for PG&E and its Pacific Gas & Electric Co. unit. Kimmel, who is also vice chairman of Rothschild Inc., had been a PG&E director since 2009.

PG&E shares were down 22 percent at $6.51 at 10:02 a.m. Tuesday in New York. Earlier, they touched $5.07. The company garnered two additional downgrades from Macquarie Group Ltd. and Argus Research Corp. Shares are down about 90 percent since the Camp Fire, the deadliest blaze in state history, broke out Nov. 8. The company’s bonds continued to fall Tuesday, and were among the most-actively traded in U.S. credit markets.

‘Vested Interest’

Chapter 11 gives creditors, the company and other stakeholders room to negotiate, which surely would include the state, 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. PG&E’s move “underscores the reality that the state cannot regulate utilities as we have for the last 100 years,” Betty Yee, the state’s controller, said in a Twitter post.

‘Sufficient Resources’

The California Public Utilities Commission said it was closely monitoring PG&E. The commission would have to sign off on any rate increases or changes required to help the company exit a bankruptcy. Newsom said he would name a representative to the regulator “very shortly.”

“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.

The company has little left in the bank -- $1.5 billion in cash and cash equivalents as of Friday -- and 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 is a strong desire for CPUC to use the stress test process to estimate a ‘cap’ of how much PCG shareholders should absorb of the 2017 wildfire liabilities,” Clayton Allen and Katie Bays, analysts at Height Securities LLC, wrote in a note Tuesday. Still, “there is no clear path to action sufficient to avoid bankruptcy at this time.”

--With assistance from Mark Chediak, Michael B. Marois and Emily Dooley.

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net;Romy Varghese in San Francisco at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Kara Wetzel, Margot Habiby

©2019 Bloomberg L.P.