California utility PG&E (PCG), or Pacific Gas and Electric, is falling in afternoon trading after the company announced plans to file for bankruptcy.
PG&E TO FILE FOR BANKRUPTCY: In a regulatory filing on Monday, PG&E said that it and its regulated utility subsidiary, Pacific Gas and Electric Company, are "facing extraordinary challenges" due to the Northern California wildfires. Following a comprehensive review, the boards of directors of the Corporation have determined that commencing reorganization cases under Chapter 11 of the U.S. Bankruptcy Code is "appropriate, necessary and in the best interests of all stakeholders," including wildfire claimants, PG&E's other creditors and shareholders. The company said it is "ultimately the only viable option to restore PG&E's financial stability to fund ongoing operations and provide safe service to customers." The Corporation expects to file for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Northern District of California on or about January 29, 2019. PG&E added that as of January 11, the corporation and the Utility had approximately $0.4B and $1.1B, respectively, of cash and cash equivalents on hand and has engaged in discussions with potential lenders with respect to debtor-in-possession financing. PG&E expects to have approximately $5.5B of committed DIP financing at the time it files for relief under Chapter 11. In a statement following the regulatory filing, the company said it remains committed to providing safe natural gas and electric service to customers as it prepares to initiate voluntary reorganization proceedings. PG&E does not expect any impact to electric or natural gas service as a result of the process and remains committed to assisting the communities affected by wildfires in Northern California.
CEO DEPARTURE: Late Sunday, PG&E said CEO Geisha Williams had stepped down, and reports said the utility company could be notifying its 20,000 employees as early as Monday that it was headed toward bankruptcy. John Simon, who has been executive vice president and general counsel since 2017 and has been with the company since 2007, was named interim CEO.
EXECUTIVE COMMENTARY: Interim chief executive officer John Simon said, "The people affected by the devastating Northern California wildfires are our customers, our neighbors and our friends, and we understand the profound impact the fires have had on our communities and the need for PG&E to continue enhancing our wildfire mitigation efforts. We remain committed to helping them through the recovery and rebuilding process. We believe a court-supervised process under Chapter 11 will best enable PG&E to resolve its potential liabilities in an orderly, fair and expeditious fashion. We expect this process also will enable PG&E to access the capital and resources we need to continue providing our customers with safe service and investing in our systems and infrastructure."
WHAT'S NOTABLE: Last week, S&P Global lowered PG&E's credit rating to single-B to reflect "what we see as the souring political and regulatory environment and our view of the limited options that the company has to effectively manage its operating, financial, and regulatory risks." Moody's also downgraded the ratings to Ba3, saying the PG&E is "increasingly reliant on extraordinary intervention by legislators and regulators, which may not occur soon enough or be of sufficient magnitude to address these adverse developments." In November, PG&E warned investors that it faced significant liability over and above its insurance capacity if its equipment was found to have sparked the deadly Camp Fire that started in Paradise, California, and spread through nearby communities, killing at least 86 people and causing billions in environmental and economic damage.
ANALYST COMMENTARY On Monday, JPMorgan analyst Christopher Turnure downgraded PG&E to Neutral and lowered his price target for the shares to $22 from $29. Turnure noted that the company's options are dwindling as the California Public Utilities Commission and legislature are showing no signs of urgency and he sees limited near term share upside. PG&E was also downgraded to In Line from Outperform at Evercore ISI.
PRICE ACTION: Shares of PG&E are down over 48% to $9.10 near midday.
Keywords: utility, bankruptcy, wildfires, Chapter 11, natural gas, electric, liabilities, creditors, shareholders, CEO