PG&E doesn’t have a lot of muni debt, but watch for knock-on effects – Analyst Snapshot

28 January 2019

The direct effect on the municipal market of Pacific Gas & Electric’s (PG&E) pending bankruptcy will be limited, as the utility has only USD 103m in tax-exempt bonds payable solely from PG&E’s revenues. An additional USD 762m is backed by bank letters of credit (see Excel link below).

 

Of more concern is the financial viability of a utility that serves 16 million people and whose service area covers most of the state. Costs to the utility, its ratepayers, and/or investors are daunting even if PG&E’s liabilities are USD 13bn rather than the previously assumed USD 30bn.

 

There also is the question of court-imposed costs intended to prevent future wildfires. PG&E said on 23 January that a federal judge’s proposed plan for wildfire safety was not feasible. The utility estimated that completing the required work by June 2019 would cost between USD 75bn and USD 150bn. To lend perspective to these figures, the company’s operating revenues for the fiscal year ended 31 December 2018 are estimated at USD 17bn.

 

In any scenario, the costs to remedy damages from the 2017 and 2018 wildfires will be borne by some combination of ratepayers, investors, property and casualty insurers, state and federal governments, and PG&E itself. Although the level of assistance to be received from the Federal Emergency Management Agency is not yet known, the California Department of Insurance indicates about USD 17bn of insurance claims were made as of 12 December 2018. PG&E’s insurance coverage was USD 840m from 1 August 2017 through 31 July 2018, increased by the company to USD 1.4bn from the latter date through 31 July 2019. Even this increased coverage is dwarfed by the newly estimated liability costs of USD 13bn.

 

Regardless of whether its bankruptcy filing is approved, PG&E’s financial situation will be weak for the foreseeable future and likely result in some combination of rate increases, decreased capital market access, and increased operating and maintenance costs. PG&E is already, as one buyside analyst told Debtwire Municipals last week, “a company that Californians hate from deep in their guts,” and the utility can count on little public or political support for its rebuilding efforts.

 

Analyst takeaway

 

Reliable and relatively economical electric service is an essential part of a modern economy and its continued growth. For what happens when that service is not available, look no further than the burden imposed for decades on Puerto Rico’s economic base by the Puerto Rico Electric Power Authority. Keeping PG&E economically viable will be a continuing challenge for California, state and federal regulators, and the utility itself.

 

The graph below indicates stability of debt backed by letters of credit, most of which is in a daily interest rate mode. Also notable is the sharp decline in unenhanced bond prices after PG&E announced on 14 January its plan to file for Chapter 11 bankruptcy on or about Tuesday 29 January.

 

 

Link to Excel file

 

by Greg Clark