PCG - Pacific Gas & Electric

[thepupil]

- Utility Co off 40% from peak on account of exposure to liability from Cali wildfires, has lost about ~$14B in value.

 

- Suspended common and preferred divvies yesterday (sending stock down ~14% today).

 

That's all I got for now.

[rb]

Wow! Suspending divvies. That means that this is for real. They'll really have to pay big for the fires.

[fareastwarriors]

If bankruptcy is not in sight, the preferreds might be a "safer" way to play this?

[rb]

Are they really going to bankrupt their giant utility?

[gfp]

Wouldn't be the first time (2001-2004)

 

Are they really going to bankrupt their giant utility?

[Foreign Tuffett]

Sounds the issue involves legal doctrines like strict liability and inverse condemnation that are (at least in this particular context) peculiar to California. PCG  could be found liable for property damages caused by wildfires even if it did not behave negligently.

 

I have no idea how to handicap the various risks involved here.

[JRM]

This is nuts.  The CPUC agreed to certain maintenance and tree trimming procedures in order to keep rates reasonable.  They could bury most lines or spend an exorbitant amount in tree trimming, but that would cause rates to be very high.  Now the CPUC can hold PCG liable even if they were following agreed upon procedures?  That's crap.

 

The dividend cut almost looks like a pre-emptive strike to me.  Why would they cut the dividend now?  It practically admits guilt.

[fareastwarriors]

This is nuts.  The CPUC agreed to certain maintenance and tree trimming procedures in order to keep rates reasonable.  They could bury most lines or spend an exorbitant amount in tree trimming, but that would cause rates to be very high.  Now the CPUC can hold PCG liable even if they were following agreed upon procedures?  That's crap.

 

The dividend cut almost looks like a pre-emptive strike to me.  Why would they cut the dividend now?  It practically admits guilt.

 

It's California! What do you expect? And I live here.

[rb]

The dividend cut almost looks like a pre-emptive strike to me.  Why would they cut the dividend now?  It practically admits guilt.

I think you're right. But I think it's more along the line of they know they're gonna be found guilty and are looking at a large fine and/or structured settlement. They are stating to stack sandbags (cash) to prevent a bankruptcy. The div is $1 billion a year. That's significant. It seems like they're certain they're gonna have to pay big time and they're being prudent about it.

 

But as Foreign Tuffett said. How do you possibly handicap the risks.

[txvalue]

This company has an interesting history. They have also had more than their share of calamity. The contaminated wastewater dumping central to the Erin Brockovich story, other wildfires, the 2010 pipeline explosion that froze the dividend for five years, the Metcalf sniper attack, entanglements with Enron and now this.

 

As mentioned above they have a great disadvantage with the way the California laws are written. If a tree falls down on power lines and starts a fire PCG is on the hook since the fire would not have happened if their equipment was not there even if the equipment was properly maintained. On top of that they have to ask for permission to spread the cost out to customers and in past cases like one from a few weeks ago this has been denied. Their past misdeeds have likely eroded any goodwill that may have aided the situation.

 

If this was not bad enough a Senator is trying to introduce legislation that will block utilities from being able to ask for this permission in the future.

 

I can only imagine what would happen if an earthquake downed lines.

 

This is certainly an interesting situation to watch.

 

 

 

 

 

[benhacker]

The folks who are buying preferred here are on the real good shit.

 

I wouldn't pay that price if the dividend was retained on the preferred and the liability question wasn't there.  Just an absolutely stupid price to pay for a UTE preferred, period.  You can buy 1940 act preferreds for nearly the same (current) rate just under par.

 

Funny market.

[Spekulatius]

I lived in CA and now in Long Island. FWIW, PGE has been much less diligent cutting trees than PSEG, the local utility here. Just and observation and obviously a small sample size.

[JRM]

Anyone looking at this one?  I don't know the technical details, but from what I gather the California legislature will allow rate relief for disaster recovery at the point where it will protect PG&E's credit rating.  It seems like this mostly eliminates the possibility of bankruptcy and there should be a path forward for restoring the dividend in a couple of years.

[txvalue]

Pcg and Eix are plunging with the latest round of wildfires and Calfire’s report. Tragic situation for California.

[alpha]

 

 

Anyone done the basic math to see what rate increases would be required to cover the potential claims from the recent fires, and become profitable again?

[sleepydragon]

Maybe BRK should buy PCG

[JRM]

There were some big names who bought into this one: Seth Klarman, Howard Marks, and David Tepper.  For Klarman this was 6% of the equity portfolio. 

 

I haven't attempted the math yet, and I'm not sure its necessarily straightforward. The Tubbs fire is still being investigated, and the Camp fire is now the biggest in California history in terms of damage.  Moody's estimated the damage cost alone at $6 billion on the high end, and the fire is not expected to be contained until the end of November.

 

I'm thinking about the systemic risk that I missed in my evaluation the first time around.  The fires last year appeared like a one-time natural disaster type of an event (to me).  The actual problems were with PCG's systems and processes related to transmission line maintenance and could not be fixed overnight.  The fact that this happened again a year later may looks like negligence, but it probably isn't.  They likely did everything in their power to trim trees, but like ran into resource constraint issues as well as people who were resistant to having their trees trimmed.

 

Fortunately I got out of this one a while back with a small loss because a better looking opportunity arose.  This is definitely a good lesson for me in risk evaluation.  Even if a company wants to mitigate an obvious risk, it may not be capable of addressing it timely enough.

[tooskinneejs]

The large price decline grabbed my attention - down 60% in a couple of weeks - but there is another issue beside the fire liability that looks troubling.  Operating cash flow is entirely consumed by capital expenditures year after year with nothing to show for it in terms of revenue growth.  The dividend, which was suspended last year, appears to have been historically funded by issuing debt.  Am I missing something here or is this an entity that doesn't really provide an economic return for shareholders?

[JRM]

The large price decline grabbed my attention - down 60% in a couple of weeks - but there is another issue beside the fire liability that looks troubling.  Operating cash flow is entirely consumed by capital expenditures year after year with nothing to show for it in terms of revenue growth.  The dividend, which was suspended last year, appears to have been historically funded by issuing debt.  Am I missing something here or is this an entity that doesn't really provide an economic return for shareholders?

 

Like most utilities, PG&E issues debt to fund capital projects and is paid back the money through rate cases (in simple terms).  They are able to depreciate their asset base and reduce their taxable income, but they are really making money (or used to).

 

My concern is regardless of how this all shakes out they should be spending money improving their system reliability, clearing right of ways, etc.  These funds will be going towards penalties, lawsuits, damages, etc instead.

 

[brycepeterson]

The large price decline grabbed my attention - down 60% in a couple of weeks - but there is another issue beside the fire liability that looks troubling.  Operating cash flow is entirely consumed by capital expenditures year after year with nothing to show for it in terms of revenue growth.  The dividend, which was suspended last year, appears to have been historically funded by issuing debt.  Am I missing something here or is this an entity that doesn't really provide an economic return for shareholders?

 

Too - you are not missing anything.  You actually have good "common sense."

[JRM]

What a dumpster fire.  If true, people should go to jail over this.

 

https://www.npr.org/2018/12/14/677003961/pg-e-falsified-gas-pipeline-safety-records-regulators-say

[alpha]

 

Reuters is reporting they are looking at various bankruptcy options.

 

https://www.reuters.com/article/us-pg-e-us-bankruptcy-exclusive/exclusive-california-utility-pge-explores-bankruptcy-filing-sources-idUSKCN1OY225

[LongHaul]

Great interview on PG&E Bankruptcy

 

https://seekingalpha.com/article/4241884-cutting-pg-and-e-thicket-podcast?isDirectRoadblock=false

[Cigarbutt]

Great interview on PG&E Bankruptcy

https://seekingalpha.com/article/4241884-cutting-pg-and-e-thicket-podcast?isDirectRoadblock=false

Thanks for the link.

My summary of the podcast---)

Three major risks:

-unaccounted for "punitive" damages and "fines"

-more fires that may end up as nagging administrative claims

-California "going further to the left"

 

Public ownership of assets appears unlikely (at this point) and whatever arrangement that may be suggested to the 'new' owners will need to be compared to the outcome if a similar arrangement were applied to the 'old' entity.

The invited speaker suggests that this is a "very simple case". I would say anything but.

[Guest cherzeca]

see https://www.wsj.com/articles/pg-e-strikes-deal-with-bondholders-as-governor-blasts-bankruptcy-strategy-11579743139?mod=hp_lista_pos2

 

PCG equity might be investable soon.  I would have feared Elliot a lot more than the Cali gov