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There Are Tricky Deals, and Then There’s PG&E: Liam Denning


Jan 29, 2019, by Liam Denning
(Bloomberg Opinion)

When a company enters bankruptcy court, one possible exit involves an acquirer pulling them out. That gets complicated with utilities, though. And when it comes to PG&E Corp., which has just filed for chapter 11, there is also a special factor to consider: California.

To say many scenarios for PG&E’s ultimate fate are under consideration would be an understatement. This is the choose-your-own-adventure of restructurings. Various voices advocate for the company’s gas grid being sold; its power grid being split into regional networks; local governments like San Francisco’s buying out their bits of the grid and municipalizing them; or none or some of the above.

Another is to sell PG&E’s assets to the highest bidder.

Utility acquisitions are tough to pull off at the best of times. As critical, and literal, parts of the landscape, local officials are wary of blessing the sale of power and gas networks for fear of a new owner jeopardizing energy supply or gouging constituents. Regulators tend to view synergies with a greedy eye.

This all gets even more complicated at the worst of times – such as when a utility has already gone bankrupt. Having suffered the embarrassment of a utility going under on their watch once, regulators are understandably antsy about potentially teeing up another disaster. Last year’s acquisition of Energy Future Holdings Corp. – one of the bits of busted-buyout case study TXU Corp. – by Sempra Energy came after a long saga of courtships and rejections as Texas’ utilities commissioners objected to this or that suitor. Knowledge of this tends to either deter bidders altogether or attract discounted offers.

What complicates things even further in PG&E’s case are California’s particularly tortuous circumstances.

California now faces a chronic risk of large, devastating wildfires. The bankruptcy court will deal with existing liabilities arising from previous ones, but any potential buyer would be more concerned about those likely coming in the future. Because of California’s unusual application of inverse condemnation (see this), its utilities can end up acting as insurers of last resort for wildfires even if they aren’t shown to have been negligent. While some of the cost can be recovered from ratepayers, how much is up to the regulator, and comes with a time lag anyway. Few, if any, buyers would be willing to take on that risk at anything but a very low price.

Even before the wildfires crisis, PG&E faced other structural headwinds. The proliferation of community choice aggregators, whereby localities buy their own power while still relying on the utility’s grid for delivery, is shrinking the customer base for traditional utilities in California. More than half of these CCAs are in PG&E’s territory. Meanwhile, as my colleagues at Bloomberg NEF pointed out in a recent report, the state’s ambitious clean-energy targets put a question mark over its natural-gas consumption across the the next couple of decades. Ordinarily, PG&E’s natural-gas network could be expected to fetch a multiple of at least 20 times earnings, or perhaps $10 billion or more. But if potential buyers foresee a relatively short lifespan, limiting the opportunity for expanding the network’s rate-base, they would demand a big discount.

One way to think about PG&E’s predicament is as a giant exercise in reapportioning costs. As I wrote here back in November, climate change is changing everything for California, and this bankruptcy is the latest sign of that. The existing system of socializing these costs through power bills isn’t fit for this purpose at this scale, especially when you consider the existing burden on lower-income ratepayers. Concurrent with PG&E’s restructuring, the onus is on the state to restructure how it channels the costs of mitigating wildfires and dealing with the aftermath of those that will likely occur anyway. As if this needs to be said, none of that is a given.

All this has an impact on the speculative trade du jour: PG&E’s residual equity value. On Tuesday morning, the stock was up 16 percent, which seems anomalous given the company’s filing but reflects bets on its ultimate value outweighing its liabilities. Choose-your-own-adventure restructurings come with many choose-your-own assumptions and final outcomes, though. In a report published Monday, Andrew DeVries at CreditSights speculated (with many caveats) there could be $7.8 billion of residual value for equity holders, assuming (among other things) a reorganized PG&E was priced at 8.5 times Ebitda and wildfire payouts came to $20 billion. That would imply about $14.40 per common share, just above the current share price. However, move that multiple up or down by half a turn and subtract or add $5 billion to the wildfire liability, and the implied residual value ranges between $30 and negative $1. Trade carefully, as they say.



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