It's Finally Time To Buy PG&E

Summary

• Wildfire victims are voting in favor of the bankruptcy plan.
• The state has dropped its opposition to the bankruptcy plan due to Covid.
• Only minor risks remain; risk is skewed to the upside.

PG&E (NYSE:PCG) has had a long road throughout bankruptcy, but now the company looks poised to turn a corner. The outlook for the equity has shifted in a positive manner, with likely returns skewed towards the upside. PG&E looks likely to be a winner in this environment.

Initially during the bankruptcy, I was bearish on the stock, as were many others. As can be seen through the following pieces published during the bankruptcy process, the initial outlook for PG&E shares seemed to be negative based on my analysis and evaluation framework:

• PG&E Will Not Be Able To Renegotiate PPAs
• As Bankruptcy Drags On, PG&E Loses Value
• More Trouble Ahead For PG&E
• PG&E's Equity To Be Deemed Worthless
• PG&E Takeover Is Not Off The Table

However, much of this bearishness was the result of uncertainty surrounding the length of the process and the potential for a state takeover or other actions which would prove detrimental to the equity holders. Although seemingly counter-intuitive, the Covid-19 crisis has pushed the state towards more leniency as it seeks to protect jobs during this difficult economic environment. As a result of this fading risk, I am now confident in the PG&E exit from bankruptcy and a surge in value for the equity holders.

Wildfire Victims are Voting in Favor of the Current Bankruptcy Plan

In recently filed documents with the court, more than 98% of the victims who have voted regarding PG&E's bankruptcy plan have voted in favor, with roughly 2/3 of the votes of the major law firms representing ~31.5k claims received (only ~47k of the 70k claims' votes need to be received). While final votes and objections are not due until May 15, it seems unlikely that there would be anything that would endanger the acceptance of the deal at this point. PG&E appears to be on track to exit bankruptcy before June 30th and has full access to the wildfire fund established by the state.

As a reminder, the plan includes $11 billion in debt commitments and $9 billion more in new equity, along with an additional $3 billion raised by issuing new shares.

While some victims have been vocal in opposition to the deal, the votes that have been received seem to paint a different story. With the state seemingly on board at this point, the bankruptcy process seems to show a clear end date and a positive outcome for PG&E.

Governor Newsom is Dropping Opposition to the Bankruptcy Plan Due to Covid

PG&E has reached a deal with Gavin Newsom which would allow it to emerge from bankruptcy by June 30. PG&E will revamp the board, suspend shareholder dividends for three years, and agree to safety and other accountability measures.

Despite his earlier opposition, the coronavirus pandemic and associated stay-at-home order have essentially forced Newsom to agree to the utility’s $23 billion plan to emerge from bankruptcy. While the governor claimed some victory by calling the deal "the end of business as usual for PG&E," the concessions made were largely symbolic, such as PG&E filling half of its board of directors with California residents and selecting the new members through an independent recruiting firm.

PG&E will also suspend dividend payments to shareholders for three years, but this is not surprising and likely something the company would have done either way.

With the governor out of the way, the major source of opposition is now out of the picture. This bodes very well for the bankruptcy process and the equity value of the company.

Minor Downside Risks Still Remain

While the major risks have certainly seemed to subside, there are legacy issues that PG&E will still need to deal with. However, end dates are visible and surprises to the downside appear unlikely.

PG&E's probation related to the 2010 San Bruno gas pipeline explosion, which is being overseen by U.S. District Judge William Alsup, has been extended to January 2022. While there is certainly headline risk for PG&E during this time, it appears the cash flow risks have largely already been priced in and announced. Judge Alsup has ordered PCG to hire more transmission line inspectors for vegetation management, in addition to keeping detailed records about the age of the transmission lines. This is on top of the insurance requirements which would cover losses suffered due to the mistakes of the inspectors that could potentially create a wildfire.

Judge Alsup also ordered PCG to keep the power on for the safe parts of the grid during forced outages, with a plan required to be submitted to the judge by May 28. This addresses the public outcry over PG&E's blackouts during the previous wildfire season.

Buy the Stock

Given the current information, the downside risk in the stock appears to be known. Especially in this economic environment, a utility such as PG&E, even without a dividend, is poised to outperform and thus remains a good buy during this time.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Balthazar Malevolent]

here’s one hedgefund who will make massive money from this: www.google.com/...

[globalopp]

There's a three-fold issue with marketing common shares after exiting bk in July:

1) Entering a new fire season after yet another below-normal rainy season.

2) No movement on 'inverse condemnation'. Despite the wildfire fund that was set up to mitigate that risk which, if it had to be tapped, would need to be replenished again and under an acrimonious political environment and exacerbated by the pandemic's impact on the economy.

3) Following massive dilution from the new share issuance, there will be an overhang of new shareholders looking to sell, including those from the victims' trust and from hedge funds. They'll try to string out the selling but neither group may be interested in being long-term investors, particularly with no dividends for at least three years.

[Balthazar Malevolent]

Some institutional investors naturally buy shares knowing that with dividends the company will be worth 40-50 bucks in 3-4 years time. Especially given that CA will set up a fund for wildfires so that $PCG never goes bankrupt again

[Ruanxjun]

I think at the end of day, it is gonna depend on the valuation when offering equity to public upon emergence. Right now the whole utility sector is not valued at the level it is supposed to be. Edison International, the closest peer comparison for PCG, is valued at PE 14 with a market cap of 20B. That being said, I think the best possible valuation PCG can get for its equity offering to the public would be around 27B. Raising 9B at this valuation, supposing it can be successfully done, means it will give out roughly 33% of common stocks to the new shareholders, which is going to be a blessing to the current common shareholders. It will also need to hand out at least 20.9% shares to the Fire Victim Trust, at a similar valuation after that, which will end up with the current shareholders getting a little less than 50% left, which equals roughly 13B.

[$Zilch$]

As we enter FIRE season, PGE raised to buy.

[Sirvasq]

Already did. Went to 8 last month and scarfed up shares.

[Ruanxjun]

I am betting on that PCG will obtain the approval from both the judge Montali and CPUC before June 30, or as early as end of this May, assuming the majority of the fire victims will vote yes to the Plan. However, I have been working on the dilution of the PCG shares and its valuation upon emergence for the past week and I have tamed my hope after my study shows that the HoldCo valuation upon emergence could only be valued at roughly 17B if the Backstop Commitment will be triggered for the 9B equity raising in a worst scenario where other equity raising efforts will turn into vain given the current dire market environment. In that case, the current common stocks will be severely diluted with roughly 6B value left after emergence, taking into consideration another 6.75B for Fire Victim Trust will be raised to further dilute the common stocks.

So in the worst scenario upon successful emergence, the current common stocks will be valued at 6B, only a less than 20% upside from where it is standing as of today.

But there still remain some uncertainty to the approval of the Plan, including the victim votes might surprise everyone after May 15, the lawyer under scrutiny for the conflict of interests covered by SF Chronicles, PCG’s ability to complete equity and debt fund raising according to the Plan. If anything goes against its way, PCG might see its share price rank to below 8 dollars, depending on what will stand its way. 

So I think at 10 dollars per share, PCG’s risk/reward ratio doesn’t look very appealing to me but I still can’t resist the temptation to place some bets.

[Sirvasq]

If you think (a) the victims don't want to cash out now, or (b) that anyone: judge, plaintiff lawyers, bondholders, shareholders, governor or cities, does not want $PCG out of bankruptcy, you have not stepped into the shoes of the stakeholders.

[Ruanxjun]

I actually think it will most likely emerge from chapter 11 by the end of June. However, my concern is the valuation of the HoldCo upon emergency. The price of 9B + 6.75B equity raising will substantially affect the residue value of current common stocks. Right now, the analysts have given a price range of 11-15 dollars post exit. I wouldn’t put more money in it if it goes above 11 dollars.

[Greenhorn Investor]

Summer is around the corner. While no one would ever wish for it, the question has to be asked...is another major fire coming with it?

[PaulC.]

Out of state investors worry about fire season. Those of us who live in PCG's service territory don't because we know PCG will cut the power to our homes during low humidity + high temperature + high wind events during the fall months.

[soujrnr]

Even during the bankruptcy proceedings of a few weeks ago, I held PCG and did quite well with it. I sold it a short time ago but it looks poised to rise again! I'll be watching it very closely on the morrow.

Best wishes, fellow traders!

[Musky5]

Absolute no brainer!

[davidtg401]

Isn't that current shareholders only own 1/3rd of the company and the coming 23bill equity is equivalently the other 2/3rds? Without a dividend for 3 years seems only limited up side to maybe 15-16$ over the next few years. Preferred shares have the cumulative divs coming soon, I think as soon as June when those divs restart. Seems all priced in to those shares

[Gridbird]

@davidtg401, I just bought again, at 25.50 on Thursday, the 6% Series A, non callable. With about $4 divi accrued come summer, Im getting about a BB+, 7% QDI with accrual backed out. SCE-G is BB+ at 5.4% now. I liked the meat on the bone at $25.50.

[davidtg401]

@Gridbird - So still some upside on the preferreds. Ok. Though it may take some time to get back to $25 but getting +6% is more interesting than 0% on the common. I've been in the EIX perferreds as an alternate play to PGE, with several good entry prices over the past couple of years.

[Gridbird]

@davidtg401, You probably can swing trade back and forth on them if you get the math down on them, if that stuff interests you.
With PCG-A for example, you really have to back out the 2 plus years of accrued dividend to get real cost yield. Thus for me at $25.50 that is really about 7% not 6%. But.... Nothing is assured until the Judge signs after victims approve. And then the accrual could go on longer as no payment date is set in stone. It could drag on a while. But for me, I dont mind it just accruing, keeps me from paying taxes on it for a while, ha.

[bminas]

The common stock dividend is suspended for at least three years. It's not at all clear to me if this applies to the various preferred issues. The preferred issues are cumulative, which may make them interesting at current interest rates. Has anyone figured out when PG&E might start paying on the preferred?

[Gridbird]

@bminas, In terms of financial baggage, the preferreds in total on a yearly basis is about $14 million...Peanuts... They are capitalization wise insignificant being old irrelevant past era issuances. If you look at this previous court document it shows a projection to pay out this year. Look at page 21 of cash flows.

s1.q4cdn.com/...

But in the turn of century previous bankruptcy, the preferreds were paid in total about a year prior to the commons getting reinstated.

[bminas]

Thanks. This helps. I was having problems finding this. This year's payout is projected at $42 million.

[Gridbird]

@bminas, Keep in mind the $42 million covers entire 2018-2020 years suspension. So payments could be dispersed late in year also.

[2 much QE]

All the stock needs now is an upgrade from a major bank or investment firm to buy rating.

[Craig69]

CrockMarket,
Here ya go:

PG&E Corp. (NYSE: PCG) was raised to Buy from Neutral at UBS.

247wallst.com/...

I have also caught word of
7.5 B in 30 year bonds under consideration by cpuc and favored by gov Slickback and his legislature.

[Buyandhold 2012]

Not for me.

There are better alternatives.

[soujrnr]

Pray tell. I'm curious to know of other alternatives. Thanks. :-)

[Deehena]

I'd need to see a calculation of value versus it present price. Three years without a dividend presumes significant capital appreciation. Since preferred shareholders will be first to be paid for past deferrals, might these have better price to value?

[globalopp]

A calc of value from Morningstar...

"We are reaffirming our $11 fair value estimate after a California Public Utilities Commission administrative law judge recommended the commissioners approve PG&E's bankruptcy exit plan with minimal changes."

"The state's inverse condemnation standard leaves shareholders at risk every time a disaster strikes. In December 2017, California regulators denied San Diego Gas and Electric recovery of wildfire costs, setting the precedent that sunk PG&E. SDG&E appealed the decision to the U.S. Supreme Court, but the court declined to review it in October 2019."

Source:
analysisreport.morningstar.com/...

And keep in mind that California is still experiencing drought conditions.

[PaulC.]

Very mild drought conditions. The Sierra and coastal foothills are still covered in green grass.

[Ruanxjun]

Thanks for sharing the link. Morning Star’s valuation of the PCG shares upon emergence is very close to that of mine, coincidentally.

[Cbmf]

This is very poor analysis. No reference to earnings, guidance and future dilution. I agree that is a buy at this price but this is a kindergarten level recomandation.

[Sirvasq]

A buy is a buy. The simpler the rationale, the better. What more do you need to know than their revenue is guaranteed in an uncertain world for nearly all stocks?

[AmericanSammy]

Hallelujah, buy, buy, buy!

[Craig69]

Sammy,
finance.yahoo.com/...