California’s largest utility soars
Shares rally after regulator eases concern on bankruptcy risk following deadly wildfires
PG&E Corp rallied as much as 49% in extended trading on Thursday after the head of the California Public Utilities Commission (PUC) said he can’t imagine allowing the state’s largest utility to go into bankruptcy as it faces billions of dollars in potential liability from deadly wildfires.
“It’s not good policy to have utilities unable to finance the services and infrastructure the state of California needs,” PUC president Michael Picker says in an interview. “They have to have stability and economic support to get the dollars they need right now.”
The end-of-day rally reversed hours of frantic selling, in which the utility fell the most since 2001, during the depths of the California power crisis. PG&E shares had plummeted 64% since Nov 7 amid fears that it would be held liable for a catastrophic wildfire that has killed 63 people, destroyed thousands of homes and scorched over 140,000 acres.
California authorities are investigating PG&E equipment as a possible cause of the so-called Camp Fire, the deadliest blaze in state history, burning about 240 km northeast of San Francisco. Officials are examining a possible second origin of the fire, state officials said during a press event late Thursday.
PG&E began roaring back after a PUC official was said to tell investors on a conference call that the agency doesn’t want PG&E to go into bankruptcy. The call was hosted by Bank of America Corp analysts and included Picker and other commission officials, according to a person who was on the call but asked not to be identified because the discussions were private. Picker confirmed he made those comments.
PG&E’s credit rating was cut late Thursday to the brink of junk by Moody’s Investors Service and S&P Global Ratings. Moody’s lowered the rating to Baa3 from Baa2, the second-lowest level of investment grade, with the possibility of a further downgrade, according to a statement. S&P lowered the rating to BBB- from BBB on rising risks that PG&E may face from the Camp Fire and warned of additional downgrades, according to a statement.
PG&E’s grade reflects an exposure of about US$10bil to 2017 wildfires, and uncertainty around 2018 liabilities, says Moody’s, which also reduced the utility’s Pacific Gas & Electric subsidiary to Baa2.
President Donald Trump will travel to California today to survey damage from the wildfires, after he provoked a backlash by repeatedly threatening to cut off federal firefighting money even as the inferno and its death toll grew.
Meanwhile, California policymakers are informally weighing legislation that would let PG&E sell bonds to cover any possible liabilities arising from the deadly Camp Fire, though no formal proposals have been made. Investors are keenly awaiting any action from Sacramento to help the beleaguered utility.
Because the legislature isn’t in session, the earliest any proposal could be introduced would be Dec 3, when new members are sworn in. Lawmakers may opt to introduce amendments to a wildfire liability law signed in September, according to a research note on Thursday from Bank of America. Provisions of the law designed to help PG&E pay for last year’s wildfires could be extended to 2018 fires.
As bodies continue to be recovered, lawmakers say they’re focused on responding to the needs of the victims.
“Any assembly member or senator would be able to introduce legislation on Dec 3, but I have not heard of anyone expressing their intent to do so,” says Kevin Liao, a spokesman for the state assembly speaker. Evan Westrup, a spokesman for California governor Jerry Brown, wouldn’t comment on possible state actions to help PG&E.
The utility’s shares had earlier fallen 31% during stock trading on Thursday.
Regulators have some tools to address wildfire costs from 2018, including establishing a stress test for PG&E and other utilities, Picker says. The agency will examine the operations of PG&E following the Camp Fire and develop methods for determining how big a financial hit it can withstand if held responsible for fire damage.
The legislature would have to pass a new measure to allow PG&E to sell bonds to help cover 2018 fire liability, much as it did for 2017, Picker says.
“Frankly, I think the legislature has some work to do around wildfires,” he says. “They may have to clarify what to do in 2018.”
Picker says he will also examine the corporate governance, structure and operation of PG&E in light of the recent wildfires.
There’s a growing consensus that any path for PG&E’s recovery will have to run through Sacramento. There’s an “urgent need for new legislation to better protect utilities from the risk of financial distress and utility shareholders from potentially unlimited fire liabilities. However, there is no clear path to new legislation in the near term,” Stephen Byrd and a group of Morgan Stanley analysts wrote in a note on Thursday. — Bloomberg