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PG&E Corp – Fire Sale

PG&E Corp (NYSE: PCG) is a major utility operating in California. They recently gained notoriety upon being found liable for the California forest fire. Since PG&E has been in the news nonstop over forest fires, power outages throughout California, court cases and bankruptcy. This has seen the share price plummet from a price of $70 to its current price of $7.42 by November 18th, 2019, an overall decline of 89%.  

The Camp Fire:

Where a lot of issues began for PG&E was the Camp Fire. The Campfire was a forest fire that burned large areas of North California and was one of the deadliest wildfires in the world killing 86 and injuring 17 people. After an investigation, it was deemed that the fire was caused by PG&E’s electrical transmission lines. Once the dust had settled PG&E was liable for $30 billion in damages from the wildfire and on January 14, 2019, the company announced it would file for chapter 11 bankruptcy. This is where we see the complete collapse in PG&E’s share price as shareholders realized how grave the situation truly was.  In the aftermath of countless court cases PG&E had to make multibillion-dollar settlements with local governments, insurance carriers, and hedge funds and is still trying to reach an agreement with wildfire victims. In order to avoid a repeat of the Camp Fire tragedy, PG&E has been shutting off power to hundreds of thousands of Californians throughout the suburbs of Sacramento and Palo Alto angering the population and government.

The Kincade Fire:

While the cause of the Kincade fire hasn’t been determined as it was only contained on November 6th of 2019, the fire was ignited near a broken wire on a PG&E transmission tower. This information raised even more questions about PG&E’s ability to function as a utility company due to the massive amounts of damage caused by the fire. The fire burned down 77,000 acres of land and forced the evacuation of 180,000 people. The added liability of this would only add further fuel to the competing restricting plans who argue that the current management of the company is unable to run the firm.  

The Current Situation:

This isn’t PG&E’s first experience with bankruptcy, in 2001 PG&E went bankrupt after Enron had been involved with manipulating the prices of electricity PG&E due an electricity shortage in 2000-2001. This bankruptcy ended up costing the state of California $43 billion and costing PG&E $10.2 billion to settle with their creditors. In 2004 PG&E emerged from bankruptcy and was able to resume operations and grow. The current situation rings very similar PG&E has declared bankruptcy however the question that remains is what form PG&E will emerge from bankruptcy in, as there are numerous plans that have been put forward.

The Bondholders Proposal:

The bondholders for PG&E have teamed up with the wildfire victims to offer a bankruptcy recovery plan that would wipe out most shareholders. The bondholders plan includes a $24 billion-dollar settlement to pay for fires blamed on PG&E. The major players behind the bond holder proposal are Elliott Management Corp and Pacific Investment Management Co. If the Bondholder proposal were to be selected, current shareholders would be moved to a 5% stake of the company as it exits bankruptcy. The Bondholder proposal is being considered and there is a very real possibility that this proposal is approved.

Coalition of Mayors Proposal:

The mayors of San Jose, Oakland, and 20 other cities plus the leaders of five counties have banded together to propose transforming PG&E into a non-profit customer-owned cooperative. For the local government coalition to pull off this maneuver they would need to pay off the creditors and wildfire victims to the tune of $60 billion which the mayors are confident they would be able to raise through low-interest government financing. This deal also completely wipes out any and all shareholder value. While this pitch has not been considered by the bankruptcy judge, yet the mayors have leverage as any bankruptcy plan must also be signed off by the California Public Utilities Commission. However, the board at PG&E has maintained that they are not for sale so the possibility of such a deal remains up plausible but currently unlikely.

PG&E Board Proposal:

The PG&E plan consists of multiple payments being made as well as inquiring with banks to secure well over $30 billion in financing to emerging from bankruptcy. The payments the PG&E board intends to make include: $8.4 billion to wildfire victims, $8.5 billion compensation to insurance subrogation claimants, $1 billion to public entities, full payment with interest of debt obligations, assumption of all pension/employee obligations. This plan being approved by the bankruptcy court would be the best case for shareholders as they would retain control of the company and PG&E would return to business as usual like the 2001 bankruptcy. PG&E has also stated that they have spoken with several of the largest banks in the country who have indicated that PG&E has ample access to debt and equity capital over $30 billion which has laid liquidity issues to rest and gives them the capital required to exit bankruptcy.

The Verdict:

PG&E presents a high-risk high reward opportunity that could be lucrative at the right entry price followed by a swift exit. Buying into NYSE: PCG below $5 presents an opportunity in which one could make a quick profit selling a few days later, as it is not recommended to take the risk in hopes that PG&E emerges a favorable deal for the shareholders. For example, this opportunity arose on the 28th of October when the Kincade fire news came out plunging the stock to $3.80, followed by a swift rise to $8 by the 5th of November. NYSE: PCG is not recommended long term because of how heavily the odds are stacked against PG&E emerging from bankruptcy under a favourable deal with Citi bank saying PG&E has a 75% chance of going to zero.