Why Bankrupt PG&E Isn't Trading At $0

It’s been a wild ride for PG&E Corporation PCG investors in the last few months. The stock had dropped down 74 percent to under $7 per share in three months when the company officially filed for bankruptcy Jan. 29. Since that filing, the stock has actually skyrocketed 66 percent.

PG&E’s decision to file for bankruptcy came as the company faced billions of dollars in potential liabilities related to California wildfires in 2017 and 2018. This week, the company asked state regulators to allow a price hike that would raise California residents’ average monthly electric bill by 7.2 percent as PG&E navigates bankruptcy.

Expert Take

Robin Deshayes, President and Chief Strategy Officer of Miltonian Capital Management, joined Benzinga’s PreMarket Prep on Friday to shed some light on the bizarre situation at PG&E.

Deshayes noted this isn’t the first time PG&E has been in hot water.

“There was an energy crisis back in the early 2000s, and there were a lot of blackouts. It was caused by the relationship between the California utilities and Enron, who was selling them power contracts,” Deshayes said.

PG&E ultimately declared bankruptcy in 2001, telling investors its power contracts had become too expensive after the fraud at Enron was discovered.

Today, PG&E finds itself in a bizarre situation in which it has declared bankruptcy, but the stock isn't crashing.

“Normally when a company declares bankruptcy, the equity trades to zero and it gets de-listed,” Deshayes said. “In PG&E’s situation, it was a healthy company, and they had this catastrophic loss all of a sudden where they had the Camp Fire, and I think they realized they were probably going to be on the hook for it, especially with the rules in California. They saw it was a $10 billion liability and it could be payable very soon, and because they are a public utility, their first priority is they’ve got to literally keep the lights on.”

The Simple Math

She said PG&E had limited options for paying its utility operations and also covering sudden wildfire liabilities. As a result, PG&E had a liquidity crisis even though comparing the company’s assets and its liabilities reveals there is actually equity value in the company, a unique situation for a company in bankruptcy.

“The simple math is this: if you take all the assets there on the 10-K, it’s $77 billion of assets. If you subtract all the normal liabilities for operating, that’s $49 billion, you have $28 billion in potential value. PG&E has said we think the liability for all of these fires is anywhere between $14 billion and as high as $30 billion. On the 10-K, they’re saying 'Ok, we’re going to call it $14 billion as a conservative estimate, and it could go higher.'

"So subtract $14 billion from $28 billion, and you still have $14 billion in equity value if you believe PG&E’s assessment of the value of its assets and then the value of all the liabilities, including these fire claims,” Deshayes said.

Based on that math, the PG&E's market cap of around $12.5 billion makes a bit of sense, she said.

While debt-holders typically hold all the cards in a bankruptcy proceeding, Deshayes said PG&E is different because it’s a public utility. Selling off assets and closing up shop isn't an option.

“They filed a bankruptcy because they need time to figure out how to cash flow these liabilities,” she said.

Looking Ahead

In the meantime, Deshayes said the biggest problem in California is trying to figure out a way to adjust the utility liability laws so that crises like these don’t continue to happen.

“If these utilities don’t have access to the debt markets, they can’t finance their operations,” she said.

While California sorts out its mess, Deshayes said PG&E's stock will serve primarily as a risky, volatile trading vehicle that reacts to the latest headlines. She said investors that held the stock at $48 when it was a stable utility paying a nice dividend shouldn’t expect a $48 share price or a dividend to return anytime soon.

The stock traded around $23.10 per share at time of publication.

Listen to the full interview with Deshayes at 34:18 in the podcast below.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.