PG & E throws everything outboard, still sinking

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What is the antechamber of chapter 11? Chapter 10½? In any case, that's where PG & E Corp. took a bank.

In theory, it could go as far as California's utility. The warning of your intention to file a bankruptcy protection request towards the end of the month triggers a clock ticking on a 15-day notice period required by state law. Something could still happen to keep the company out of the field.

That something is largely personified in the new Governor Gavin Newsom. Facing perhaps $ 30 billion in liabilities from forest fires in 2017 and 2018, PG & E is indeed a state department. It has a business value of about $ 28 billion – and this was before its shares returned again Monday morning after the notice had been filed (it fell less than $ 24 billion to write this) . All the return routes to a semblance of faith from capital markets run through Sacramento, whether it is a liability ceiling, a debt securitization permit, or even a clear demonstration of support. The PG & E stock is indeed an option on California politics, which is as scary as it sounds.

And those policies do not handle the way of PG & E. It's an understandable rage in the company (see this webcast from last Thursday's meeting of the California Public Utilities Committee for a taste). The abrupt departure of CEO Geisha Williams on Sunday, coming after some other executives were released and PG & E announced a radical corporate overhaul, seems to be another attempt to appease public opinion.

However, Newsom's brief statement on Monday morning seemed at most ambivalent. Essentially, his office takes note of the declaration of bankruptcy, but emphasizes that, whatever happens, it has focused on keeping the lights on, on the victims of forest fires and on maintaining California's climate goals.

The bankruptcy for a usefulness of this scale, facing the chronic risk of ongoing fires, raises their own unknowns, above all in terms of potentially conflicting powers between the regulator and the judge and, ultimately, higher financing costs charged tax payers. Politically, on the other hand, it also offers a new governor the prospect of drawing a line under events that preceded it and then working with the legislature on a radical reorganization of the Northern California network (together, hopefully, with problems) associated with land management, forestry and insurance). It should be remembered that, whatever happens, the chronic risk of forest fires means that the state now faces a high and continuous cost in terms of strengthening its electricity grid and managing future disasters. Finding the most desirable way to confront tax payers (and perhaps taxpayers) will require some extraordinarily creative political maneuvers.

This is obviously all speculative (the stock is an option, remember?). However, the timing of the PG & E filing, which joins Williams' sudden exit, suggests that political support for keeping the company out of bankruptcy has diminished. In his filing, PG & E notes that it had about $ 1.5 billion in cash starting Friday. Although not entirely clear, this figure is presumably net of the $ 800 million that the company would publish as collateral following last week's rating downgrades. If so, PG & E has had enough to make the interest payment of $ 21.6 million on Tuesday and probably had enough to keep going for several more quarters. Greg Gordon, an analyst with Evercore ISI, estimates that PG & E's negative free cash flow and planned debt repayments would be worth an additional $ 1 billion by the end of the year.

On this basis, the decision to press the trigger now suggests that PG & E does not expect state support to be imminent in time, and perhaps the process is beginning in an Ave Maria effort to get it. Judging by the market reaction, there is little expectation of that response.

To contact the author of this story: Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist dealing with energy, mining and raw materials. Previously he was editor of the Heard on the Street column of the Wall Street Journal and wrote for the Lex column of the Financial Times. He was also a banker of investments.

© 2019 Bloomberg L.P.

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