Author Topic: PG&E - Potential Bankruptcy  (Read 24201 times)

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #120 on: April 13, 2019, 05:26:54 AM »
In case some are following or interested.

This bankruptcy so far is like a walk in the park.

The legislators have come up with a somewhat predictable plan and it seems that concerned parties (despite diverging interests) may be able to get their act together.

https://www.gov.ca.gov/wp-content/uploads/2019/04/Wildfires-and-Climate-Change-Californiaís-Energy-Future.pdf

Relevant background data and analysis:
https://riskcenter.wharton.upenn.edu/wp-content/uploads/2018/08/Wildfire-Cost-in-CA-Role-of-Utilities-1.pdf
https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Financing-Third-Party-Wildfire-Damages-1.pdf

The future remains unknowable but this may become interesting with the smell of smoke and when the threat of utility breakdown to municipals is no longer a footnote.
« Last Edit: April 13, 2019, 05:30:19 AM by Cigarbutt »


Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #121 on: April 29, 2019, 05:57:22 AM »
PG&E just obtained a regulatory rate hike to pay some of the company's costs for rain and wind events in 2016 and 2017.

There is realization (recent government documentation) that home building in high-risk areas should be curtailed and that the recent trend in higher wildfire activity may be due, in large part, to a natural reversion to the mean due to excessive previous fire suppression and poor forest management. Here's a reference that captures the spirit of data and analysis that has been out there for at least 20 years:
https://fee.org/articles/let-forests-burn-if-you-truly-love-them/?utm_campaign=FEE%20Daily&utm_source=hs_email&utm_medium=email&utm_content=72148453&_hsenc=p2ANqtz--rLO-JA3sNMQ3amNwGBYs1khAwfty71tl5tNIl8_jZFlcPl3OuCJ1d6Qvp3YWvySMLbwOQA9_Bgc7qIO-rbqe7

A few days ago, there was a rumor that Berkshire Hathaway was looking to buy PG&E, which Mr. Buffett nipped in the bud. I would say there is value in a continuing entity but further wildfire losses this year and the next may have a catastrophic impact on residual value. Interesting to follow.

DRValue

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Re: PG&E - Potential Bankruptcy
« Reply #122 on: October 06, 2019, 03:04:46 AM »
Re-visiting this now that more news has come out.

https://seekingalpha.com/news/3504109-pg-and-e-gets-34b-debt-financing-rival-creditor-groups-fight

$34b secured funding. Key point for shareholders:

"PG&E said the financing terms are "far superior" to a rival proposal from the group led by Elliott Management and Pacific Investment Management, which would lead to an "unjustified windfall" of billions of dollars for the creditors at the expense of shareholders and utility customers."

Looks as if the board are fighting for shareholders, and creditors have confidence.

I would assume creditors would need to have full visibility of losses and cash flows ahead of committing to funding, so it could be likely that the path out of bankruptcy is now known.

Need to do more research on the terms etc. though, and work out the equity value. A key point would be the previous bond terms interest rate and the new bond terms which i don't believe are disclosed. However, "far superior" terms could mean an interest rate reduction of 25%-50%. Could they be guaranteed by Cali'?
[E]xpedience does not license omnipotence.

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ValueMaven

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Re: PG&E - Potential Bankruptcy
« Reply #123 on: October 06, 2019, 05:37:48 AM »
This might be worth taking a long shot in ... could still be a $0 however

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #124 on: October 06, 2019, 05:50:40 AM »
Re-visiting this now that more news has come out.

https://seekingalpha.com/news/3504109-pg-and-e-gets-34b-debt-financing-rival-creditor-groups-fight

$34b secured funding. Key point for shareholders:

"PG&E said the financing terms are "far superior" to a rival proposal from the group led by Elliott Management and Pacific Investment Management, which would lead to an "unjustified windfall" of billions of dollars for the creditors at the expense of shareholders and utility customers."

Looks as if the board are fighting for shareholders, and creditors have confidence.

I would assume creditors would need to have full visibility of losses and cash flows ahead of committing to funding, so it could be likely that the path out of bankruptcy is now known.

Need to do more research on the terms etc. though, and work out the equity value. A key point would be the previous bond terms interest rate and the new bond terms which i don't believe are disclosed. However, "far superior" terms could mean an interest rate reduction of 25%-50%. Could they be guaranteed by Cali'?
The California legislature has provided and is likely to provide more implicit but conditional support. Despite popular backlash, oldco is likely to continue to play the regulatory capture game, an area where they still possess a relative edge.

I find the debtors have done a decent job, with nature cooperating. Adversaries have come and include the Elliott Group and the aim of the vulture group is to get their part of the flesh but their true intents may become all too apparent at times (see docket 4119, exhibit A).
https://restructuring.primeclerk.com/pge/Home-DocketInfo

It seems like the Judge may appreciate the superior value of the way to deal with subrogation claims, as described by the debtors. Interestingly, from what I can gather from public disclosures, Baupost has been able to buy various subrogation claims over time (total value about 2.6B, bought at around 30 to 35% of 'face' value) and they would recover 11/20B under the proposed plan. One has to deduct an uncertainty premium and the value of time but Baupost (which remains a large holder of common equity), at least on that level, would do very well with their 'distressed' subrogation claims.

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #125 on: October 25, 2019, 09:25:18 AM »
The San Francisco Bay area may feel some its warmest temperature ever this weekend and PG&E, despite being bankrupt, remains deeply involved until proven otherwise and new claimants would tend to build a higher priority through an already complicated resurgence plan.

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #126 on: November 06, 2019, 03:52:05 PM »
Today, nationalization risk played out as mayors raised the customer-owned specter right after the governor threatened a more active role during the restructuring. I hear Spekulatius' opinion about the relative advantages of mutually-owned utilities and, in the last few days, have experienced (positively even if the outage touched my household) how a publicly-owned electric utility can efficiently face adverse and unexpected weather-related developments (more than 10% of people in my province had an electrical outage for some time) but there are significant downsides to public ownership and I continue to think that the public ownership model is unlikely to spread in California. From an opportunistic point of view, it is just too bad that nationalization risk did not exactly conjugate with recent fire activity risk.

Apart from the nationalization component, bankruptcy risk is strongly related to regulatory risk. This may be too optimistic but the assumption is that the different and relevant authorities with skin in the game will come together to share the risk and to allow an adequate return on capital invested by private inputs in this new normal environment.

An example below from the insurance world showing that there may be a realization that the causes behind the recently recognized hardship are multiple. California is special because of the inverse condemnation doctrine but it has applied wrong incentives with the incredibly significant development of property value at risk exposed to wildfires. The application of new building codes is also necessary. Poor incentives have also built up through poor insurance regulation policies.
https://www.iii.org/sites/default/files/docs/pdf/fighting_wildfires_with_innovation_wp_110419.pdf

There are many options to fund the potential risk outcomes associated with the new reality such as catastrophe bonds and state-sponsored recovery bonds.
https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Financing-Third-Party-Wildfire-Damages.pdf

Edit: I forgot to mention the role of the goats but this is covered elsewhere in another thread.
« Last Edit: November 06, 2019, 03:56:13 PM by Cigarbutt »

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #127 on: December 08, 2019, 06:18:39 PM »
This remains very complex but the BK pretty much evolved in a typical way, at least so far.

Risks:
-nationalization risk
-bankruptcy risk
-more wildfire risk

Late last week, there was an agreement reached for wildfire claims (13.5B). Together with the previous resolution of state and insurance claims (1B + 11B), I would say a significant layer of uncertainty has been removed and the likelihood that oldco (old equity) comes out favorably, given the remaining risks, may now get recognized.

Old PCG needs to come out with a reorg plan with a deadline fixed in Q2 2020.
Assumptions:
-old equity 'pays' for the after-tax total claims of the past
-post BK equity valuation at 22-24B, similar to end 2017
-need to raise 17B in new equity
-debt raised for future wildfire costs as part of a future effort, rate-backed and state-backstopped

So "value' about 10 to 13 per share. It looks like the price may rise to this reasonably conservative range in the short term.

NB This is, in large part, an exercise in liability discounting. One liability was easier to discount:
https://www.marketwatch.com/story/was-a-280-million-emerald-destroyed-in-california-wildfire-pge-is-dubious-2019-11-19?siteid=rss&rss=1
« Last Edit: December 08, 2019, 07:38:01 PM by Cigarbutt »

Cigarbutt

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Re: PG&E - Potential Bankruptcy
« Reply #128 on: December 14, 2019, 08:17:30 AM »
The latest 'agreement' dealing with individual wildfire claims was felt by some (some Seeking Alpha contributors and some others) to lessen the pressure on the equity backstop reported last September.
http://s1.q4cdn.com/880135780/files/doc_downloads/wildfire_updates/2019/09/2019.09.17_Plan-Financing-Summary_FINAL.pdf

The agreement, simplified, implied 6.75B to victims in installments ending in early 2022 and 6.75B in company stock that would result in a significant stake in the 'reorganized' PG&E.

Gov. Newsom, after a solicited debtor request from the party looking for a nod of approval, gave the following answer:
https://htv-prod-media.s3.amazonaws.com/files/letter-from-governor-newsom-12-13-19-1576295434.pdf

This remains complex++ and anything can happen but the Governor is, in a simplified form, asking for a more significant commitment (governance and new equity).

There may be another interesting entry point if PG&E does not respond fast enough or in an unconvincing way. It seems to me that PG&E is positioned to deliver a reasonably sufficient message (more essential governance change, more 'new' equity commitment in order to have a less leveraged phoenix entity and perhaps a specific equity commitment for the wildfire fund to come that will deal with future costs). I keep my baseline requirement for +/- 17B in new equity.

IMO, there continues to be a window of opportunity for a white knight such as BRK energy who could supply sufficient equity capital, management capacity, governance reassurance and long-term stability for cost of capital not even considering the reinsurance expertise that will play an increasing role going forward, given the wildfire context and the inverse condemnation rule.

I understand the Governor's tone, given the noise at the constituency level but the public authorities have to get their act together and it is difficult to explain how the insurance department does not seem to understand that they are more a part of the problem than a part of the solution:
https://ktla.com/2019/12/13/insurance-plan-fights-california-commissioners-push-to-offer-homeowners-state-wildfire-coverage/
Unrecognized costs remain so qualified until the forces of nature start to send invoices.
It looks like old PG&E will 'pay' perhaps more than its 'fair' share of 'natural' costs due to its bad-boy and rogue behavior and attitude and it may recapture some of these costs over time but the state needs to remember that they can't have their cake and eat it too.
I would say the bankruptcy is likely to discover the best outcome but an adult in the room would help.
« Last Edit: December 14, 2019, 08:35:00 AM by Cigarbutt »