PG&Es Bankruptcy Has Gotten Trickier and Riskier for Its Stock – Barron’s

Uncertainty surrounding the potential that PG&E equipment helped spark the Kincade Fire, shown here burning in Windsor, Calif., this past week, is clouding the investment case for the utility. Photograph by Eric Thayer/The New York Times/Redux

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Wildfires are tearing across California again, and that has made Wall Street anxious about investing in the states electric utilities. But investors seem to be discounting the doomsday scenario for PG&E.

PG&E (ticker: PCG) filed for bankruptcy protection in January to deal with tens of billions of dollars in costs from a series of wildfires caused by its equipment in 2017 and 2018. In a July cover story, Barrons said that risk-tolerant investors might want to consider wagering on the shares. State regulators and PG&E executives both hadand still havestrong incentive to get the utility out of bankruptcy quickly, and the utility was planning to cut customers power to prevent fires.

A lot has changed since then.

First, wildfire victims got permission to pursue a lawsuit in state court against PG&E. They claim the utility is responsible for damages from the 2017 Tubbs Fire, even though Californias Forestry & Fire Division, known as Cal Fire, determined it wasnt the cause. That trial is scheduled to begin in January. The judge also approved a bondholder groups request to propose its own restructuring plan to compete with PG&Es. That plan would give bondholders including Pimco and activist Elliott Management up to a 95% stake in PG&E and leave current shares essentially worthless.

Then on Oct. 23, a blaze of unclear origin began in PG&Es territory. While the utility had implemented blackouts to prevent its equipment from causing wildfires, its large high-voltage transmission lines were still operating in the area, and it reported a problem with one of those towers near the start of the fire.

PG&E stock fell more than 20% following this news on Monday. The stock rebounded 62% from its nadir, but at Thursdays close of $6.17, its still far below the $18.50 it traded at when we ran our cover story.

The price of PG&Es high-coupon bond maturing in 2034 dropped nearly 14 cents on the dollar early last week after climbing most of the year. The bond recovered 10 cents of that loss by Thursday, when it was trading above par at $1.01 per dollar.

The rebound in PG&Es stock and bonds stems from several factors. First is U.S. Bankruptcy Judge Dennis Montalis decision to appoint a mediator to act as a go-between for competing groups in the reorganization. Second is the limited damage so far attributed to the Kincade Fire, the Northern California blaze that PG&Es equipment may have caused.

Its also important to note the benefits that PG&E could derive from a state law passed earlier this yearif it exits bankruptcy by a June 2020 deadline. A quick exit would allow the utility to access a wildfire fund that could pay up to 40% of the wildfire claims against PG&E, and would make it easier to pass along wildfire costs to customers.

Still, thanks to a quirk in bankruptcy law that gives priority to 2019 fire costs, bondholders recoveries have been called into question for the first time. Bondholders had previously expected to get paid back in full, though there was some disagreement between them and shareholders over the rate on interest payments accrued during the bankruptcy process.

Thats where the mediator comes in. The mediation process may help break the stalemate between bondholders and shareholders, who have been fighting to control the company once it exits from bankruptcy. The shareholders had signed a preliminary $11 billion settlement agreement with the insurers and hedge funds that own wildfire claims, while the bondholders had won the support of wildfire victims for their latest reorganization plan.

The PG&E trade remains a tough call. Theres still a small chance shareholders could recover some value, but that possibility could disappear once another severe wildfire starts.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

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PG&Es Bankruptcy Has Gotten Trickier and Riskier for Its Stock - Barron's

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