Final certification isn’t until May 22. But preliminary voting results show a strong majority in favor of PG&E Corp’s (PCG) restructuring plan, allowing the California utility to exit the bankruptcy it entered in January 2019.
The "in favor" column apparently includes victims of the 2018 Camp Fire. Under the state’s doctrine of "inverse condemnation," PG&E is insurer of last resort for damages from wildfires in which its equipment plays a role. The company’s primary reason for filing Chapter 11 was financial protection from the historic cost in lives and property from the fire, until a deal could be worked out.
Two turbine exhaust ducts of the Pacific Gas and Electric Co. (PG&E) Colusa Generating Station in ... [+]
The road to the current agreement took many twists and turns, including battling a court-approved counter proposal from an investor group led by Elliott Management. But in the end, PG&E devised a compromise that almost everyone is willing to live with, even if they’re not entirely satisfied. That includes California Governor Gavin Newsom, who aggressively pushed for a relatively quick restructuring.
In a March 25 piece here in Forbes: "PG&E: Some Good News for Troubled Times," I noted fear of COVID-19 fallout was delivering a final push to bring the parties together. This vote shows the deal agreed to has held long enough to cross the finish line.
Restructuring faces a final regulatory hurdle at the California Public Utility Commission. But with the administrative law judge in the case recommending approval, the CPUC is likely to sign off quickly, once the bankruptcy court certifies the vote.
Actual financing should be easier following recent recovery in PG&E common shares. And increased odds of success are also showing up in the price of company bonds. While they won’t pay interest until the utility exits Chapter 11, almost all trade well above par value, reflecting what’s owed.
Exit still must happen by June 30, the deadline for PG&E to join the state’s new $21 billion wildfire insurance fund. But with bankruptcy court Judge Dennis Montali denying last-ditch motions from dissident fire victims to derail restructuring, the time has come to focus on what happens starting July 1.
The road doesn’t get any easier for PG&E. It’s clear the company’s transmission and distribution system needs a massive upgrade. That includes tougher infrastructure and more effective use of data and sensor systems, so management can detect problems before they get out of control.
It seems inevitable the company will have to resort to deeply unpopular electricity shutoffs during the upcoming wildfire season. And while California’s new insurance fund is impressive on paper, it’s also untested and could face severe strains if it’s a particularly bad weather year.
Paying off creditors and wildfire victims also leaves PG&E more heavily indebted. That means recovery depends on the company’s continuing ability to access financial markets on reasonable terms. And while low interest rates should hold down borrowing costs, the CPUC may also cut companies’ allowed returns on equity later this year.
California’s electricity utilities do have two big advantages over most sector peers. First, revenues are decoupled from volume sales, insulating cash flow from fluctuations in demand resulting from weather as well as COVID-19 fallout. That makes earnings highly predictable and therefore relatively straightforward for management to plan around, which is appealing to investors.
Second, California still has big plans to de-carbonize its economy and to adopt more renewable energy. And the state’s regulated utilities are the critical engines for achieving those goals.
During its Q1 earnings call, downstate utility Edison International (EIX) affirmed its "Pathway 2045" strategy. That calls for speeding adoption of renewable energy and storage, and electrifying transportation, building spaces and water heating. And it includes hardening the power grid against future weather hazards as well.
Edison’s ongoing rate case proposes $19.4 to $21.2 billion in new spending through 2023, for annual rate base growth of 7.5 percent. And the primary intervenor in the case—California Public Advocates—has countered with a recommendation to approve slightly more than 90 percent of the request.
The near-agreement augurs well for a speedy resolution on terms that are positive for Edison’s financial health. It’s also the latest sign that even with the wildfire crisis, regulators are still on the same page with companies and supportive of their growth.
That’s not to say California utilities are popular with the public, or aren’t one false step from another safety-related crisis. But so long as companies are pushing the state’s energy transformation, there’s a potential road to recovery.
Moreover, investor expectations are conservative to say the least. Edison sells for less than 13 times expected 2020 earnings and PG&E for barely 4 times. Even Sempra Energy (SRE) trades at a discount to the Dow Jones Utility Average’s 19 times, despite the fact less than one-third of its Q1 earnings were from California electricity sales.
Low share prices and comeback potential are a powerful combination for patient investors willing to place bets and wait. Owners of power plants selling energy to state utilities may get a faster payoff.
PG&E stayed current paying for energy purchases while in bankruptcy. But Chapter 11 triggered provisions in power plant financing that require the cash stay at the project level, as surety for lenders. As of the end of Q1, Clearway Energy’s (CWEN) was owed $148 million.
Management will be able access that cash after PG&E exits Chapter 11, and it plans to fund the acquisition of 482 megawatts of contracted wind power capacity. The purchase is projected to add $23 million annually to cash available for distribution over the next five years, starting with lifting 2020 CAFD to $1.70 a share.
Clearway has consistently stated intent to "normalize" dividend growth in the second half of 2020. And there’s means for a sizeable bump: Expected 2020 CAFD would cover by 1.28 times an increase to 33.1 cents per quarter, the amount paid before power plant cash was trapped. That’s a 58 percent boost from the current 21 cents.
