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PG&E Preparing for Many Legal Skirmishes; Credit Sinks to Junk

The major credit rating agencies now rate PG&E Corp. and its utility below investment grade at  junk status, and in a regulatory filing the Northern California operator said it is facing significant additional legal filings related to last November's devastating Camp Fire.

Gov. Gavin Newsom, in his second week on the job, has formed a task force to identify potential actions that could be taken by the state to help utility customers during the company’s planned, upcoming bankruptcy. Newsom emphasized that PG&E's plight has his full attention.

The governor said once he came into office, he instructed his team to meet with the California Public Utilities Commission (CPUC), “the utility, and labor unions representing PG&E workers, and my staff and I have been in constant contact throughout the week and over last weekend."

In the months ahead, the former San Francisco mayor pledged to work with the lawmakers and stakeholders on "a solution that ensures consumers have access to safe, affordable and reliable service, and fire victims are treated fairly."

Newsom told reporters on Tuesday that he is not worried about utility service being impacted. He noted that PG&E, as part of preparing for a voluntary Chapter 11 filing, paid for natural gas supplies a month in advance. Separately the utility posted collateral with the California Independent System Operator (CAISO) to cover all amounts owed and all projected future obligations.

PG&E remains in contact with Newsom and key state legislators, according to spokesperson Matt Nauman. "We will continue our coordination with them as we move forward."

Since the planned bankruptcy was made public, legislative leaders have shifted their focus from PG&E's financial viability to protecting utility customers, fire victims and assuring the reliability of the gas and electric systems.

State Senate President Pro Tempore Toni G. Atkins (D-San Diego) said PG&E operations would be a top priority. She is most concerned about "protecting fire victims, and the integrity and reliability of electric and gas service to California’s consumers...This is a critical concern for California’s public safety and economy, and we will not take it lightly."

In the state Assembly, Democrat Chris Holden of Pasadena, a leading advocate for wildfire relief who co-sponsored state Senate Bill 901, called the bankruptcy announcement "deeply concerning for the state, fire victims and utility customers."

PG&E reportedly is holding $34.5 billion in renewable energy contracts for electricity between now and 2043. In 2017 the utility bought $3.3 billion in renewable power, mostly wind and solar. Environmental and renewable energy groups are raising concerns that the bankruptcy filing could set back the state’s aggressive climate change programs that depend on each utilities' push for alternative energy.

Some analysts are recommending that the state play a big role to help resolve the situation. Stanford University’s Michael Wara, director of the climate and energy policy program at the Woods Institute for the Environment, said the state could have a "calming effect" for investors, creating more certainty about who is going to get paid.

"That could happen by the state guaranteeing to pay bonds issued by PG&E if the utility defaulted," Wara said.

Moody's Investors Service downgraded PG&E and the combination utility with a negative ratings outlook. The corporate family rating was reduced to "Caa3" from "Ba3." The “Caa3” rating is ninth among 11 junk ratings in the Moody's system. Moody's said its review for PG&E, which began in mid-November, is now complete, and the final downgrades result from the impending bankruptcy.

The bankruptcy announcement and likelihood that PG&E will miss an upcoming $21.6 million interest payment on senior notes prompted downgrades from S&P Global Ratings. It also reduced the issuer and short-term ratings.

PG&E's stock has continued to decline. At midday Wednesday it had fallen another 8% plus to $6.35/share. The share price has eroded since mid-October, when it was trading near $48/share.

In a Securities and Exchange Commission filing this week, PG&E said it expects to be the target of "numerous additional claims" in conjunction with 2017 and 2018 wildfires. Last year’s Camp Fire alone is estimated by the California Department of Insurance to exceed $9 billion in actual losses for commercial and residential property, personal/commercial vehicles and agriculture. For all of the fires over the last two years, the state agency estimated an aggregate of $17 billion in claims.

Last September, PG&E said the state insurance department calculated 55,000 wildfire insurance claims from 2017 totaling more than $12.28 billion, $10 billion of which was related to the 2017 Northern California fires involving only PG&E.

The utility has about $840 million in insurance coverage. As of Jan. 11, it had $400 million and $1.1 billion in cash and cash equivalents for the corporation and utility, respectively, PG&E told federal regulators.

"PG&E has engaged in discussion with potential lenders regarding debtor-in-possession (DIP) financing," and it expects to have $5.5 billion of DIP financing when it files for relief under Chapter 11, the filing said.

A voluntary bankruptcy would be the second by the giant San Francisco-based utility company in less than 20 years. It filed in 2001 as an offshoot of the failed electricity deregulation effort in the West. The parent company did not enter Chapter 11 at that time. The utility emerged from bankruptcy in April 2004.

 

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