Expert Take On PG&E Equity Offering, Bankruptcy Outlook

PG&E Corporation PCG shares jumped 4% Thursday following a new filing that revealed shareholders have agreed to a $15 billion offering to help the company pay for its reorganization efforts.

PG&E stock has had a rollercoaster year as investors try to navigate the company’s massive potential liabilities for recent California wildfires and its complex bankruptcy proceedings.

California’s Plan

The stock had dropped 74% to under $7 per share in three months when the company officially filed for bankruptcy Jan. 29. Since that filing, the stock has actually gained 34% as the state of California has pushed new legislation that would reset the relationship between utility companies like PG&E and the state moving forward.

The wildfire law currently on the table in California would require PG&E, Edison International EIX and Sempra Energy SRE to spend a combined $5 billion improving equipment safety. In addition, the three companies will pay a combined $7.5 billion up front and another $300 million each over the next 10 years to create a California wildfire insurance fund. The potentially $21 billion fund will help protect the utility companies and their shareholders from future liabilities.

However, the new legislation is far from a clean state for PG&E. First of all, PG&E must emerge from bankruptcy to be eligible for participation in the fund. Second, the company may be forced to issue equity and dilute current shareholders in order to finance its current wildfire liabilities.

Expert Take

Robin Deshayes, President and Chief Strategy Officer at Miltonian Capital Management, discussed PG&E this week on Benzinga’s PreMarket Prep.

“In terms of past fires, PG&E is completely on the hook for past fires, and that means fires before 2019,” Deshayes said.

Deshayes said there are a number of uncertainties, including PG&E’s exit from bankruptcy and which version of the bankruptcy plan the judge will approve.

“It’s almost mandatory to be a functioning company in order to be in this wildfire fund, so that means they have to exit bankruptcy by June 30, 2020,” she said. “The question is what is the bankruptcy plan going to look like and how will it affect the equity in this case?”

Deshayes said PG&E has floated its plan out there, which would be very shareholder friendly and preserve as much value as possible.

“If their version of the plan were to pass, that’s probably the best-0case scenario for shareholders, Deshayes said.

However, PG&E’s creditors, including insurance companies, will also have bankruptcy plan proposals.

"If the creditors’ version of the plan or something more like the creditors’ versions are accepted by the judge, that would be negative for the equity...The main point of the creditors’ plan is that they would exchange their debt for equity,” she said.

What's Next

In that scenario, PG&E would eliminate its debt at the expense of diluting its common shareholders.

For now, Deshayes said PG&E investors will be watching closely over the next few weeks for any signs of whether or not PG&E will maintain its exclusivity in proposing bankruptcy solutions or whether creditors will get a say in the process.

PG&E shares traded higher by 3.14% to $18.73 at time of publication.

Related Links:

What's Next For PG&E? Bondholders Look To Forge New Path For The Company

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

A PG&E yard in San Francisco. Photo by Peter Merholz via Wikimedia.