The Power Of Monopoly: PG&E’s Plan To Keep The Lights On

  • PG&E is currently under investigation for their potential involvement in several wildfires, including the costliest one of 2018.
  • The company cannot afford the liabilities from the fires and are in talks of declaring bankruptcy.
  • PG&E got their rating cut to junk by S&P, and are under examination by the other rating agencies.
  • The company is 84% institutionally owned, and several of the top hedge funds have increased their stake.

News about PG&E (PCG) has been almost impossible to avoid recently. They are under investigation for their role in several wildfires throughout California, most notably the Camp Fire, which resulted in 86 deaths and was the costliest natural disaster of 2018. For all of the fires, PG&E could face liabilities that total a minimum of $30 billion.

PG&E currently has a market cap of less than $10 billion and an enterprise value of $28 billion, at time of writing. They have about $4 million in cash on hand. They are looking to potentially sell their gas assets to help pay for the potential damages, or utilize California legislation to forgive it all together. Their stock has tanked by 31% over the past four days. Reuters released a report stating that the company has considered filing for bankruptcy.

PG&E has a pretty robust background regarding natural disasters over the past twenty years. Groundwater contamination, criminal negligence for failing to trim trees, exploding pipelines with activity that registered on the earthquake scale, and potentially causing twelve fires are some of the most notable ones.

“It’s a utility, what’s the worst that can happen”. Apparently, quite a lot.

pge share.png

Source: Capital IQ

Walking the Edge of a Liquidity Crisis: The Downgrade to B

Among all the news, the S&P Global Ratings downgraded PG&E’s credit to B from BBB-, which is officially junk status. S&P Ratings has threatened to lower the rating even more, especially if management proves to be unable to create a quality plan to protect credit status in the future.


Source: Bloomberg 

PG&E will have to pay much more to borrow in the future, due to this new bond status. PG&E notes are now trading at a yield of 9.9%, which is much more than the 7.5% average for other high yield bonds. Moodys and Fitch are also in the process of reviewing the company, and if they decide to cut the bonds to high yield, that would be further increase pressure on PG&E.

If the other two rating agencies decide to downgrade PG&E, a $800 million cash collateral call would rip through the company. The company has already suspended its dividend and drew out all lines of credit. They are running out of liquidity options, increasing the potential to continue on with bankruptcy plans, if another downgrade occurs.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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