- 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.
This article was written by
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