PCG - Pacific Gas & Electric

[Cigarbutt]

Back of a napkin numbers:

-25.5B liability determined for previous wildfire costs, defined as "rate-neutral" which should accrue to previous equity owners (but part of that may somehow be passed on to others (state, customers) through indirect means such as a lower cost of capital related to state guarantees and such going forward).

-6-7B liability, which should be PG&E's 'commitment' to the state insurance fund to be used for future wildfire costs (way to accommodate the inverse condemnation rule and the new normal wildfire risk). The total fund will have about 21B, with about half coming from dedicated rate increases (this fund, in a way, already exists as it could be considered a continuation of a previous fund set up after the previous bankruptcy and which was set to end in 2021). The capital structure of this commitment needs to be defined.

-about 1B per year allocated to 'safety' measures and which should eventually come from negotiated and CPUC-approved rate increases.

 

The public entities are late in the game for a takeover, especially given the huge incentives for all players to emerge from a bankruptcy caused by wildfires costs, in an environment where wildfire costs continue to be a recurring threat. However, they hold significant leverage directly (state insurance fund) and indirectly through the CPUC. They have been able to obtain a June 2020 deadline and the emergence will be conditional on CPUC-approval (in the earlier bankruptcy, the CPUC had eventually proposed a competing chapter 11 plan) whose approval will be conditional on the access to the state insurance fund. Even if PG&E decided to build an in-house reserve, it would be unlikely that the CPUC would allow a rate increase based on this capital commitment outside of the state fund. A relative wild card is that spreads (cost of capital for debt and equity) are very low and the appetite for less than ideal business plans remains high. However, it is likely that the capital structure of the emerging PG&E will be negotiated, with a likely relative increase in the equity component. I still have this at a share price between 10 to 13 bucks per share as value-neutral, at this point.

[JRM]

Is anybody interested in PG&E these days now that they've officially exited bankruptcy?

 

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

[lnofeisone]

Is anybody interested in PG&E these days now that they've officially exited bankruptcy?

 

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

I am starting to look at this one. Could be an interesting LEAP play. On the selling by the claimants, I thought individuals settled for half-cash/half-stock. I'll admit, I haven't started the google engine just yet but I'll ask the question. Does the trust have to cash the shares and payout as soon as the lock up expires?

 

Of course they get this yesterday - https://www.pressdemocrat.com/article/news/kincade-fire-victims-sue-pge-over-damage-from-2019-blaze/?sba=AAS

[JRM]

My understanding is there is no obligation to sell upon the lockup expiring.

[samwise]

Is anybody interested in PG&E these days now that they've officially exited bankruptcy?

 

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

How are you valuing them?

On what metrics are they half of their peers?

[JRM]

Is anybody interested in PG&E these days now that they've officially exited bankruptcy?

 

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

How are you valuing them?

On what metrics are they half of their peers?

 

Admittedly I'm pretty bad at forecasting their EBITDA or earnings (especially in this situation) so I'm going with analyst estimates.  Forward PE is coming in around 6-7 where most electric/gas utilities are 20+ right now. 

[Spekulatius]

I like the risk reward for EIX better And bought a little recently. Better company with way less issues , but higher valuation ( albeit still discounted) . Pays a dividend. One foot hurdle vs 3 foot hurdle (PCG).

[thepupil]

I read recent pitches on it and said to myself "this seems like something I'll never get high conviction in and has some tail risk, albeit compensated tail risk/low-ish beta/low correlation", threw 100 bps in it and devoted no additional energy to it.

[CorpRaider]

I read recent pitches on it and said to myself "this seems like something I'll never get high conviction in and has some tail risk, albeit compensated tail risk/low-ish beta/low correlation", threw 100 bps in it and devoted no additional energy to it.

 

My dude.

[5xEBITDA]

I read recent pitches on it and said to myself "this seems like something I'll never get high conviction in and has some tail risk, albeit compensated tail risk/low-ish beta/low correlation", threw 100 bps in it and devoted no additional energy to it.

 

My dude.

 

I support this strategy, although I'd have probably done 25-50bps. It is either a zero or multi-bagger.

 

[winjitsu]

Why not OTM leaps then? I see some Jan / 22s which could pay off well if it re-rates

[arcube]

What does this mean?

 

I read recent pitches on it and said to myself "this seems like something I'll never get high conviction in and has some tail risk, albeit compensated tail risk/low-ish beta/low correlation", threw 100 bps in it and devoted no additional energy to it.

[thepupil]

That I am lazy and a pansy.

 

That when Mr Market serves you a regulated utility at these multiples, there is surely a catch.

 

 

[DooDiligence]

Is anybody interested in PG&E these days now that they've officially exited bankruptcy?

 

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

Howard Marks is.

[fareastwarriors]

Baupost Collects $3 Billion Wagering on PG&E’s Wildfire Claims

 

Klarman’s firm is known for navigating litigation, bankruptcy

 

Baupost Group, the hedge fund run by Seth Klarman, received more than $3 billion in July from its bet on insurance claims against PG&E Corp. connected to a series of deadly California wildfires, according to people with knowledge of the matter.

 

https://www.bloomberg.com/news/articles/2020-08-21/baupost-collects-3-billion-wagering-on-pg-e-s-wildfire-claims?srnd=premium

[Guest cherzeca]

Baupost Collects $3 Billion Wagering on PG&E’s Wildfire Claims

 

Klarman’s firm is known for navigating litigation, bankruptcy

 

Baupost Group, the hedge fund run by Seth Klarman, received more than $3 billion in July from its bet on insurance claims against PG&E Corp. connected to a series of deadly California wildfires, according to people with knowledge of the matter.

 

https://www.bloomberg.com/news/articles/2020-08-21/baupost-collects-3-billion-wagering-on-pg-e-s-wildfire-claims?srnd=premium

 

very deft trade.  this was a coup in the special situations/bankruptcy minefield... exceptional for any investor, but especially for a value investor as don't tell me there was any safety cushion in this

[Cigarbutt]

Baupost Collects $3 Billion Wagering on PG&E’s Wildfire Claims

Klarman’s firm is known for navigating litigation, bankruptcy

Baupost Group, the hedge fund run by Seth Klarman, received more than $3 billion in July from its bet on insurance claims against PG&E Corp. connected to a series of deadly California wildfires, according to people with knowledge of the matter.

https://www.bloomberg.com/news/articles/2020-08-21/baupost-collects-3-billion-wagering-on-pg-e-s-wildfire-claims?srnd=premium

very deft trade.  this was a coup in the special situations/bankruptcy minefield... exceptional for any investor, but especially for a value investor as don't tell me there was any safety cushion in this

This is interesting.

Baupost entered the picture in Q3 2018 after having built a significant stake in common shares (14.5M shares paid at around or above 45$ per share). Then came November 2018 with the most devastating fire that triggered bankruptcy. Baupost averaged down buying more common shares in 2019 (after filing, up to total 24.5M shares, prices around 15$ per share) suggesting that they put the odds in favor of an emergence out of bankruptcy with oldco at least partially intact, which seemed (IMO) like a reasonable proposition. Baupost has been selling their common shares since the September 2019 settlement at prices mostly between 10 and 15 and more recently at prices below 10. At end of Q2 2020, they still had 4.7M shares. So, they have realized, and will likely exit the position with, a significant loss.

By building a position in subrogation claims, they improved their recovery outlook by going up the capital structure. They bought about a third of their subrogation claims early on (paying around 30 to 35 cents on the dollar (insurers involved in those transactions reported these claims on their books at around 25 to 30 cents on the dollar). Then, public disclosure is incomplete, but they bought more subrogation claims and became, by far, the largest holder of these claims. They were part of the Ad Hoc Subrogation Group (85% of all subrogation claims), became an essential player and were able to negotiate an all-cash settlement at about 59 cents on the dollar (contrary to the 'Public Entities' which settled with cash and stock(!)).

In the end, on a net basis, they will end up with a reasonable profit although it looked very bad and messy for a while.

It's hard to assess the risk adjusted return but i'm impressed nonetheless, given the circumstances.

[5xEBITDA]

Baupost Collects $3 Billion Wagering on PG&E’s Wildfire Claims

Klarman’s firm is known for navigating litigation, bankruptcy

Baupost Group, the hedge fund run by Seth Klarman, received more than $3 billion in July from its bet on insurance claims against PG&E Corp. connected to a series of deadly California wildfires, according to people with knowledge of the matter.

https://www.bloomberg.com/news/articles/2020-08-21/baupost-collects-3-billion-wagering-on-pg-e-s-wildfire-claims?srnd=premium

very deft trade.  this was a coup in the special situations/bankruptcy minefield... exceptional for any investor, but especially for a value investor as don't tell me there was any safety cushion in this

This is interesting.

Baupost entered the picture in Q3 2018 after having built a significant stake in common shares (14.5M shares paid at around or above 45$ per share). Then came November 2018 with the most devastating fire that triggered bankruptcy. Baupost averaged down buying more common shares in 2019 (after filing, up to total 24.5M shares, prices around 15$ per share) suggesting that they put the odds in favor of an emergence out of bankruptcy with oldco at least partially intact, which seemed (IMO) like a reasonable proposition. Baupost has been selling their common shares since the September 2019 settlement at prices mostly between 10 and 15 and more recently at prices below 10. At end of Q2 2020, they still had 4.7M shares. So, they have realized, and will likely exit the position with, a significant loss.

By building a position in subrogation claims, they improved their recovery outlook by going up the capital structure. They bought about a third of their subrogation claims early on (paying around 30 to 35 cents on the dollar (insurers involved in those transactions reported these claims on their books at around 25 to 30 cents on the dollar). Then, public disclosure is incomplete, but they bought more subrogation claims and became, by far, the largest holder of these claims. They were part of the Ad Hoc Subrogation Group (85% of all subrogation claims), became an essential player and were able to negotiate an all-cash settlement at about 59 cents on the dollar (contrary to the 'Public Entities' which settled with cash and stock(!)).

In the end, on a net basis, they will end up with a reasonable profit although it looked very bad and messy for a while.

It's hard to assess the risk adjusted return but i'm impressed nonetheless, given the circumstances.

 

My intel is that they are probably breakeven on PGE after all is said. Maybe slight loss or profit, but closer to breakeven. The analyst who got them into PGE was fired.

[Cigarbutt]

^Thanks for the "color".

Was PCG a good investment in Q3 2018 is an interesting question and maybe it's about the same question now (see end of this post).

 

Just looking at the "tranche" of subrogation claims that they first bought (about a third of the total in the end), given some indirect disclosure, it appears that this gain alone is somewhat larger than the loss (realized and unrealized ) from the common stock position. They likely paid more for subsequent subrogation acquisitions but the about 3.5B amount they just received represents 80% of the funds set aside; there will be another 20% "distribution". But they were fighting against Elliott Management and the legal bill must be very large.

 

An aspect that i thought interesting was the correlation between the two positions. Some people called it "hedging" which i think does not fit but the two investments were related. By building what has been reported to be a 39% position of subrogation claims, they effectively became an almost indispensable party (the most important party in the most important unsecured group) when the time came to settle the larger pieces of the puzzle. By settling perhaps to a slightly lower amount of recovery, they were able to modulate, to some degree, the odds of bankruptcy emergence and the market value of their common stock ownership upon emergence. Subrogation claims can be considered speculative but, at some level of pricing, it could be considered a sound investment the same way it potentially made more sense to invest in PCG common stock when the price became low enough during this episode of bankruptcy.

 

Is PCG a good investment now is an interesting question. If stars align, it could do very well. However, they still have the same problems as before, only worse and, interestingly, the Covid episode was salutary for the emergence as it took public attention away from the incomplete restructuring. PCG is still (even more than in Q3 2018) highly levered, characterized by questionable operational capacity, still exposed to wildfires (see news now and the season is only starting), still has significant unresolved lawsuits going on (Kincade Fire etc) and has very little social capital left as a corporate 'citizen'. The Californai State has set up wildfire funds but the underlying problems (inverse condemnation, real estate development at interface, insurance subsidies, climate change(?) etc) have not been resolved. There is a possibility that this revisits bankruptcy in the foreseeable future. That would explain the ongoing selling by Mr. klarman despite relatively low historical prices.

 

[Guest cherzeca]

any time you get into subrogation claims, you get into manifold legal issues, you get into political risks etc. very smart but dangerous strategy.  big time props, though this was a ballsy move that risked the eunuch result

[Cigarbutt]

any time you get into subrogation claims, you get into manifold legal issues, you get into political risks etc. very smart but dangerous strategy.  big time props, though this was a ballsy move that risked the eunuch result

i respect your opinion about the general risks of subrogation claims and you must know that the legal context includes the made whole doctrine subject to contractual modification or negotiation through bankruptcy. Along the way in this specific case, keeping in mind a valuation analysis with waterfall scenarios and potential fulcrum identification, it was reasonable to formulate an expectation that subrogation claims would be left with one testicle. Men with one testicle tend to do very well but there are some psychological barriers to surmount.

[DooDiligence]

any time you get into subrogation claims, you get into manifold legal issues, you get into political risks etc. very smart but dangerous strategy.  big time props, though this was a ballsy move that risked the eunuch result

i respect your opinion about the general risks of subrogation claims and you must know that the legal context includes the made whole doctrine subject to contractual modification or negotiation through bankruptcy. Along the way in this specific case, keeping in mind a valuation analysis with waterfall scenarios and potential fulcrum identification, it was reasonable to formulate an expectation that subrogation claims would be left with one testicle. Men with one testicle tend to do very well but there are some psychological barriers to surmount.

 

Verse 2 seems pertinent.

Maybe not but I was reminded of this song for some reason.

 

[JRM]

Wow.  Dan Loeb made PCG an 8% (and largest) equity position for Third Point; 5% for Oaktree, and big add for some guy Seth Klarman.

[Fitz]

Wonder is any of that was debt getting restructured into new common?

[SI]

In loeb’s letter, he said he was the fulcrum investor in the equity offering that brought them out of bankruptcy- none of these guys ended up with equity unintentionally.