PG&E - Potential Bankruptcy

[Cigarbutt]

Could someone have predicted that there would have been a series of fires this big in California in 17 and 18? Thoughts on risk assessment?  2015 was the highest dollar damage year on record before 2017 and it was $3b (see Cali Fires History).

 

Verisk had ~2 million households at high risk of wildfire damage in Cali

https://www.verisk.com/insurance/campaigns/location-fireline-state-risk-report/#

 

Cali Fires history

http://cdfdata.fire.ca.gov/pub/cdf/images/incidentstatsevents_270.pdf

 

California Wildfire history

https://en.wikipedia.org/wiki/List_of_California_wildfires

 

Electric Service Area of PG&E

https://www.pge.com/tariffs/tm2/pdf/ELEC_MAPS_Service_Area_Map.pdf

Could be a good case for Cali legislating for black swans, which this appears to be.

From an insurance catastrophe modeling perspective, a rising trend had been defined in the last few years before 2017 and 2018. The most important variables seemed to be 1-property development at the wildland interface (40% of new homes, typically more expensive properties) and 2-the length of the fire season. The models tend to be historical (trend following) and include variables that are very difficult to measure precisely (ignition by lightning, ignition by human activity etc). Despite the rising trend, the 2017 and 2018 fire seasons were clear outliers.

 

From an insurance perspective, going forward, could the premiums related to wildfire exposure be a fonction of the location of the property, the bulding materials and a reasonable obligation of the owner to maintain a minimum level of protection (branches, debris etc)?

[LongHaul]

Could someone have predicted that there would have been a series of fires this big in California in 17 and 18? Thoughts on risk assessment?  2015 was the highest dollar damage year on record before 2017 and it was $3b (see Cali Fires History).

 

Verisk had ~2 million households at high risk of wildfire damage in Cali

https://www.verisk.com/insurance/campaigns/location-fireline-state-risk-report/#

 

Cali Fires history

http://cdfdata.fire.ca.gov/pub/cdf/images/incidentstatsevents_270.pdf

 

California Wildfire history

https://en.wikipedia.org/wiki/List_of_California_wildfires

 

Electric Service Area of PG&E

https://www.pge.com/tariffs/tm2/pdf/ELEC_MAPS_Service_Area_Map.pdf

Could be a good case for Cali legislating for black swans, which this appears to be.

From an insurance catastrophe modeling perspective, a rising trend had been defined in the last few years before 2017 and 2018. The most important variables seemed to be 1-property development at the wildland interface (40% of new homes, typically more expensive properties) and 2-the length of the fire season. The models tend to be historical (trend following) and include variables that are very difficult to measure precisely (ignition by lightning, ignition by human activity etc). Despite the rising trend, the 2017 and 2018 fire seasons were clear outliers.

 

From an insurance perspective, going forward, could the premiums related to wildfire exposure be a fonction of the location of the property, the bulding materials and a reasonable obligation of the owner to maintain a minimum level of protection (branches, debris etc)?

 

Very interesting CigarButt. Thanks.

 

Here is another article on it. 

https://www.vox.com/energy-and-environment/2018/11/13/18092580/paradise-california-wildfire-2018

 

The funds invested in this seem to be from the East Coast.

 

And 2018 was not the worst case.  Although high compared to historical numbers - it could have been much bigger.

 

[DRValue]

I've read that Morgan Stanley put out a note that the judge may throw out the bankruptcy case as they aren't insolvent. This may explain the stock price movement.

[Cigarbutt]

...

Here is another article on it. 

https://www.vox.com/energy-and-environment/2018/11/13/18092580/paradise-california-wildfire-2018

 

The funds invested in this seem to be from the East Coast.

 

And 2018 was not the worst case.  Although high compared to historical numbers - it could have been much bigger.

Whatever scenario going forward, a key variable will be the estimation and allocation of wildfire costs (prevention, mitigation and damage liabilities).

 

While there is a clear increasing trend in the last 20 to 30 years and while expectations of continuation of this trend in the near future is reasonable, it appears that the costs attributed to PG&E need to be discounted and whether continuing as oldco or newco, it is reasonable to expect that relevant players (federal, state (definition of risk zones, improved forest risk management), local authorities (zoning etc) and the regulator (CPUC vs PG&E, property insurance etc)) will coordinate an improved plan and determine a more appropriate allocation procedure.

 

Interesting to note also that taking the recent trend (that has appeared since the 70's) within a larger perspective shows that there was larger acreage burned of US forest lands earlier in the 20th century followed by a relatively quiet period and some suggest that the relatively quiet period was due to improved but non-specific suppression efforts, suggesting also that what we see now (because of fire consequences easing conditions) is a return of the pendulum around a rising trend, pretty much like the stock market at times.

[SharperDingaan]

...

Here is another article on it. 

https://www.vox.com/energy-and-environment/2018/11/13/18092580/paradise-california-wildfire-2018

 

The funds invested in this seem to be from the East Coast.

 

And 2018 was not the worst case.  Although high compared to historical numbers - it could have been much bigger.

Whatever scenario going forward, a key variable will be the estimation and allocation of wildfire costs (prevention, mitigation and damage liabilities).

 

While there is a clear increasing trend in the last 20 to 30 years and while expectations of continuation of this trend in the near future is reasonable, it appears that the costs attributed to PG&E need to be discounted and whether continuing as oldco or newco, it is reasonable to expect that relevant players (federal, state (definition of risk zones, improved forest risk management), local authorities (zoning etc) and the regulator (CPUC vs PG&E, property insurance etc)) will coordinate an improved plan and determine a more appropriate allocation procedure.

 

Interesting to note also that taking the recent trend (that has appeared since the 70's) within a larger perspective shows that there was larger acreage burned of US forest lands earlier in the 20th century followed by a relatively quiet period and some suggest that the relatively quiet period was due to improved but non-specific suppression efforts, suggesting also that what we see now (because of fire consequences easing conditions) is a return of the pendulum around a rising trend, pretty much like the stock market at times.

 

You might want to keep in mind what happens when there is a big fire.

 

The blaze is bigger, hotter, & more intense, because it fed on years worth of dry dead wood and debris. The resultant intensity created fire venturi, that pulled fresh air into the base of the fire, drove up temperature, and turned everything into ash (versus charred wood). There isn't going to be another fire in the same area, until there's something to burn again. Next season there's another fire, but in a different place.

 

The traditional solution has been to deliberatly fire an area every few years, to remove the fuel accumulation.

Frequent, smaller, and cooler fires that more resemble the natural cycle.

But hard to do in a city environment.

 

Of course, the alternative is to either pay a high price for the super-cat insurance, OR

deliberately fire the area every few years , in return for a lower premium - AFTER the big fire has been through.

Hence, maybe going through the insurance route, is perhaps the lower risk route by which to approach this?

 

SD

 

 

[Cigarbutt]

...

Of course, the alternative is to either pay a high price for the super-cat insurance, OR

deliberately fire the area every few years , in return for a lower premium - AFTER the big fire has been through.

Hence, maybe going through the insurance route, is perhaps the lower risk route by which to approach this?

...

SD

The underlying theme here is that PG&E or equivalent have to pay what they have to pay but there has been a wildfire problem oversimplification.

 

There is a lot of useful data coming from "the deep state" which is partially unavailable these days due to shutdown issues but my thoughts about the insurers' role in the past are negative. Federal assistance for disaster relief and subsidies to lower insurance premiums have been major factors behind the quasi-exponential rise in property value exposure in the high risk areas of the wildland interface and I feel that a new "wildfire relief" federal insurance program modeled on the national flood and terrorism program would only compound the wrong incentives issue.

 

With the growing resurgence of interest (research, public awareness etc), I assume that the right people will come together but some (like Fukuyama) lament at the fact that the Forest Service, which used to be a source of pride, has become a shadow of itself, representing a typical example of a dysfunctional democracy and failed governance. As with most things, believing in cycles helps.

 

If interested, here are some useful references:

https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer=https://www.google.ca/&httpsredir=1&article=1681&context=elr

https://fas.org/sgp/crs/misc/RL30755.pdf

https://www.nap.edu/read/24792/chapter/4#22

 

The last link shows (page 20, fig.3-3A) the to-be President in 1961, doing his part to suppress a fire.

[Guest cherzeca]

reasonably good article from wsj:  https://www.wsj.com/articles/pg-e-filed-for-bankruptcy-why-did-its-shares-then-rise-11548946801?mod=hp_lead_pos6

[Cigarbutt]

U.S. District Judge William Alsup, who is overseeing PG&E’s probation for safety violations that led to felony convictions for the 2010 explosion of one of its gas pipelines, set the tone for oncoming (and sometimes unidirectional) discussions and continued to apply pressure to rebalance safety over profit before the 2019 fire season. "Does the judge just turn a blind eye and say, PG&E, continue business as usual, continue to kill people?”

 

In a related and qualified as unsolicited filing from an electrical workers union who could describe a “superior, direct, first-hand knowledge of PG&E’s grid”, the group offered the following opinion: “The goal of reducing to zero the number of wildfires caused by PG&E in the 2019 season is noble but not practical,... Inspecting 2.3 million electrical distribution poles and 150,000 transmission structures across 125,000 miles of power lines by June is not a realistic or pragmatic idea.”... “In fact, it is not possible.”

 

It seems also that relevant participants have started to embrace the idea that the problem is multi-dimensional.

https://www.dailydemocrat.com/2019/01/30/california-may-trim-environmental-review-in-wildfire-fight/

[DRValue]

U.S. District Judge William Alsup, who is overseeing PG&E’s probation for safety violations that led to felony convictions for the 2010 explosion of one of its gas pipelines, set the tone for oncoming (and sometimes unidirectional) discussions and continued to apply pressure to rebalance safety over profit before the 2019 fire season. "Does the judge just turn a blind eye and say, PG&E, continue business as usual, continue to kill people?”

 

In a related and qualified as unsolicited filing from an electrical workers union who could describe a “superior, direct, first-hand knowledge of PG&E’s grid”, the group offered the following opinion: “The goal of reducing to zero the number of wildfires caused by PG&E in the 2019 season is noble but not practical,... Inspecting 2.3 million electrical distribution poles and 150,000 transmission structures across 125,000 miles of power lines by June is not a realistic or pragmatic idea.”... “In fact, it is not possible.”

 

It seems also that relevant participants have started to embrace the idea that the problem is multi-dimensional.

https://www.dailydemocrat.com/2019/01/30/california-may-trim-environmental-review-in-wildfire-fight/

 

In UK health and safety law, to prove you aren't liable you have to demonstrate that you did everything a reasonable person would, to mitigate the risk of the event happening.

 

I'm sure there are plenty of laws similar around the world, and this is probably a principle used outside of health and safety.

 

I bring this up because the judge's plan for wildfire prevention is almost certainly above what is reasonable relative to the risk imo.

 

At this point in the cycle pg&e is the villain so must be punished, by everyone, even if it is unreasonable. I'm sure pragmatism will prevail once the initial anger fades.

 

But there's no getting around pg&e's apparent poor record.

[Cigarbutt]

^From the odds point of view, PG&E appears to be in a weak position versus certain fires especially the Camp Fire, which happened to be the straw that broke the camels back, except that it was more like a ton of bricks.

http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf

 

Most of the numbers work here is discounting the liabilities (settlement, time value etc).

 

PG&E will have to roll with the punches (and they're likely to be good at that, absent a deadly blow) and should become a champion of security and safety but that does not appear to be printed in their DNA (Board and top exec overhaul would help).

 

This is likely to get worse before (if) it gets better.

[DRValue]

I quite like the debt, but want it dirt cheap. I think it'll be OK in a restructure.

[DRValue]

^From the odds point of view, PG&E appears to be in a weak position versus certain fires especially the Camp Fire, which happened to be the straw that broke the camels back, except that it was more like a ton of bricks.

http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf

 

Most of the numbers work here is discounting the liabilities (settlement, time value etc).

 

PG&E will have to roll with the punches (and they're likely to be good at that, absent a deadly blow) and should become a champion of security and safety but that does not appear to be printed in their DNA (Board and top exec overhaul would help).

 

This is likely to get worse before (if) it gets better.

 

For those fires currently under investigation, do you know which may be attributed to PG&E or which are suspected? Good info.

 

Also, Camp Fire is roughly 3 .3 times the number of structures and Tubbs was estimated to be $7b of liability, so an estimate of $23b seem fair?

[Cigarbutt]

^From the odds point of view, PG&E appears to be in a weak position versus certain fires especially the Camp Fire, which happened to be the straw that broke the camels back, except that it was more like a ton of bricks.

http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf

 

Most of the numbers work here is discounting the liabilities (settlement, time value etc).

 

PG&E will have to roll with the punches (and they're likely to be good at that, absent a deadly blow) and should become a champion of security and safety but that does not appear to be printed in their DNA (Board and top exec overhaul would help).

 

This is likely to get worse before (if) it gets better.

For those fires currently under investigation, do you know which may be attributed to PG&E or which are suspected? Good info.

 

Also, Camp Fire is roughly 3 .3 times the number of structures and Tubbs was estimated to be $7b of liability, so an estimate of $23b seem fair?

 

Convert the debt with a hair cut and you're set. So I'm interested at 39c on the $.

The most decisive work will come from the evaluation of major risks: 1- 2019-20 "weather" risks, 2-"nationalization" risk and 3-risk of newco.

 

The valuation work will be work in progress.

(Re)insurers may be a good starting point:

https://www.munichre.com/en/media-relations/publications/press-releases/2019/2019-01-08-press-release/index.html

[DRValue]

If PG&E issues $5b+ of new secured debt, then the existing unsecured debt becomes secured.

https://www.bloomberg.com/news/articles/2018-11-14/any-pg-e-bankruptcy-would-pit-bonds-against-burnt-out-homes

 

PG&E have sought up to $5.5b worth of DIP financing. It has also just got approval for $1.5b of that amount.

https://www.thestreet.com/investing/stocks/pg-e-files-for-bankruptcy-protection-seeks-5-5-billion-in-dip-funding-14848011

 

Wall Street Journal says the DIP is secured.

https://www.wsj.com/articles/pg-e-gets-court-ok-to-tap-1-5-billion-of-bankruptcy-loan-11548979436

 

I'm unsure if the DIP will be paid back out of cash flows as an amortizing loan as the bankruptcy process continues.

 

But if the DIP loans hit $5b and are secured, I wonder if they would count as new debt for the purposes of determining whether unsecured would become secured?

I haven't read the bond terms yet, but I doubt information about DIP financing would be in there?

[Foreign Tuffett]

I would be careful here, as in these types of situations individual investors and small fund managers are disadvantaged versus big distressed debt players like Appaloosa and Baupost. Here are two anecdotes to try and illustrate what I mean:

 

- When Enron filed bankruptcy Baupost had one analyst do nothing but Enron-related work for 4 years

 

- Big players involved with Puerto Rico bonds pay specialized services like Puerto Rico Clearinghouse for expert analysis of relevant legal decisions and regulatory actions

 

http://www.pr-clearing.com/

 

 

I'm sure similar resources are being devoted to PG&E's predicament. While I can only speak for myself, I don't have the expertise or resources to untangle this Gordian Knot.

 

[Cigarbutt]

I would be careful here, as in these types of situations individual investors and small fund managers are disadvantaged versus big distressed debt players like Appaloosa and Baupost. Here are two anecdotes to try and illustrate what I mean:

 

- When Enron filed bankruptcy Baupost had one analyst do nothing but Enron-related work for 4 years

 

- Big players involved with Puerto Rico bonds pay specialized services like Puerto Rico Clearinghouse for expert analysis of relevant legal decisions and regulatory actions

 

http://www.pr-clearing.com/

 

I'm sure similar resources are being devoted to PG&E's predicament. While I can only speak for myself, I don't have the expertise or resources to untangle this Gordian Knot.

Thanks for the wise words.

 

Interesting because the analogy was also nicely used by a journalist/columnist (Liam Denning, January 7th, 2019) who summarized the issue quite well:

"The Gordian knot here is that the cost of the wildfires, the risk of future wildfires (which is rising) and the expense of hardening the Californian grid against that risk must ultimately be met by ratepayers. Finding the most cost-effective way to do this over the long term must be balanced against ensuring PG&E (and its shareholders) pay a price for any of the company’s shortcomings."

 

In the 90's some commentators suggested that deregulation of the California electricity market was akin to cutting the Gordian knot, only to find out that the knot had to be reweaved after some turmoil.

 

At the very least, this will be interesting to watch and a potential outcome is that the knot remains intact.

[DRValue]

I would be careful here, as in these types of situations individual investors and small fund managers are disadvantaged versus big distressed debt players like Appaloosa and Baupost. Here are two anecdotes to try and illustrate what I mean:

 

- When Enron filed bankruptcy Baupost had one analyst do nothing but Enron-related work for 4 years

 

- Big players involved with Puerto Rico bonds pay specialized services like Puerto Rico Clearinghouse for expert analysis of relevant legal decisions and regulatory actions

 

http://www.pr-clearing.com/

 

 

I'm sure similar resources are being devoted to PG&E's predicament. While I can only speak for myself, I don't have the expertise or resources to untangle this Gordian Knot.

 

My base case is now that common have no value and I'm considering the put options.

I like the debt but another hurdle for small retail investors is the terms of conversion sometimes only include recovery for big players. That leads to the need for more of a discount for me.

 

The flip side is that pg&e aren't found liable for camp fire but I'm not factoring that in yet.

[Cigarbutt]

The other two California investor-owned utilities are getting agitated and (one) raising the specter of bankruptcy, under the watch of rating agencies.

So, potential pressure for some action that may mitigate the big risks.

 

The inverse condemnation doctrine is enschrined in the Constitution and the present climate (political and popular) makes it unlikely that an amendment is ratified.

 

However, the application of strict liability may be potentially modified using a more flexible definition to pass on the cost to ratepayers. There seems to be a potential relevant precedent (a 1997 state Supreme Court ruling that used this standard in a water-district case) and, for the 2017 fires, there seemed to be enough political will to get this through in a more sustainable way.

 

Also, the idea of a California Wildfire Catastrophe Fund has been floated and could take the form of a partially funded pre-disaster program that could be modified according to the evolving wildfire experience.

 

If the State starts to discuss splitting the company, PG&E may come up with a different type of split and it may get interesting.

Following the playbook, the company also announced a Board restructuring, to add "a fresh perspective".

[Cigarbutt]

The story is slowly evolving.

True that the situation is incredibly complex and that amazingly competitive vulture players are circling around the residual stake but a potentially simple thesis is that there will be equity left for current holders assuming a reasonable transfer of funds from current owners to previous victims and victims to come.

 

Some private discussions are becoming not so private:

https://www.latimes.com/business/la-fi-pge-bankruptcy-exit-plan-20190327-story.html

 

In essence the opportunity funds 1-would seed new capital and end up with about 50% of the equity, 2-it would mean that a "penalty" fund be set up for previous wildfires with a reasonable discount to present estimates and with PG&E being the prominent seeder of that fund and 3-it would mean that a new "wildfire fund" would be set up to cover future costs unrelated to negligence which would require participation from relevant actors: PG&E, other California utilities, state (directly and through securitization).

 

It seems that this is a balanced plan (from all perspectives) and may represent one of the best outcomes for equity holders but the plan assumes an optimistic emergence in early 2020, an unusual cooperation from a diverse group of stakeholders with diverging interests and an absence of material wildfire damages for the upcoming fire season with potentially uncomfortable prioritized post-petition claims.

 

In my book, the common shares are priced for perfection.

Interesting times.

 

 

[SharperDingaan]

Time has also run out for them ....

 

We're going into the 2019 'summer' fire season, and global warming remains alive and well.

If you're the 'saviour'; you'll either want a guarantee that any 2019 fire season 'surprises' do NOT land on you, or to delay the discussion until after the 2019 fire season is done. No matter what, there will be ANOTHER hair-cut on whatever the current asset valuation is.

 

SD

[Cigarbutt]

In case some are following or interested.

 

This bankruptcy so far is like a walk in the park.

 

The legislators have come up with a somewhat predictable plan and it seems that concerned parties (despite diverging interests) may be able to get their act together.

 

https://www.gov.ca.gov/wp-content/uploads/2019/04/Wildfires-and-Climate-Change-California’s-Energy-Future.pdf

 

Relevant background data and analysis:

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2018/08/Wildfire-Cost-in-CA-Role-of-Utilities-1.pdf

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Financing-Third-Party-Wildfire-Damages-1.pdf

 

The future remains unknowable but this may become interesting with the smell of smoke and when the threat of utility breakdown to municipals is no longer a footnote.

 

[Cigarbutt]

PG&E just obtained a regulatory rate hike to pay some of the company's costs for rain and wind events in 2016 and 2017.

 

There is realization (recent government documentation) that home building in high-risk areas should be curtailed and that the recent trend in higher wildfire activity may be due, in large part, to a natural reversion to the mean due to excessive previous fire suppression and poor forest management. Here's a reference that captures the spirit of data and analysis that has been out there for at least 20 years:

https://fee.org/articles/let-forests-burn-if-you-truly-love-them/?utm_campaign=FEE%20Daily&utm_source=hs_email&utm_medium=email&utm_content=72148453&_hsenc=p2ANqtz--rLO-JA3sNMQ3amNwGBYs1khAwfty71tl5tNIl8_jZFlcPl3OuCJ1d6Qvp3YWvySMLbwOQA9_Bgc7qIO-rbqe7

 

A few days ago, there was a rumor that Berkshire Hathaway was looking to buy PG&E, which Mr. Buffett nipped in the bud. I would say there is value in a continuing entity but further wildfire losses this year and the next may have a catastrophic impact on residual value. Interesting to follow.

[DRValue]

Re-visiting this now that more news has come out.

 

https://seekingalpha.com/news/3504109-pg-and-e-gets-34b-debt-financing-rival-creditor-groups-fight

 

$34b secured funding. Key point for shareholders:

 

"PG&E said the financing terms are "far superior" to a rival proposal from the group led by Elliott Management and Pacific Investment Management, which would lead to an "unjustified windfall" of billions of dollars for the creditors at the expense of shareholders and utility customers."

 

Looks as if the board are fighting for shareholders, and creditors have confidence.

 

I would assume creditors would need to have full visibility of losses and cash flows ahead of committing to funding, so it could be likely that the path out of bankruptcy is now known.

 

Need to do more research on the terms etc. though, and work out the equity value. A key point would be the previous bond terms interest rate and the new bond terms which i don't believe are disclosed. However, "far superior" terms could mean an interest rate reduction of 25%-50%. Could they be guaranteed by Cali'?

[ValueMaven]

This might be worth taking a long shot in ... could still be a $0 however

[Cigarbutt]

Re-visiting this now that more news has come out.

 

https://seekingalpha.com/news/3504109-pg-and-e-gets-34b-debt-financing-rival-creditor-groups-fight

 

$34b secured funding. Key point for shareholders:

 

"PG&E said the financing terms are "far superior" to a rival proposal from the group led by Elliott Management and Pacific Investment Management, which would lead to an "unjustified windfall" of billions of dollars for the creditors at the expense of shareholders and utility customers."

 

Looks as if the board are fighting for shareholders, and creditors have confidence.

 

I would assume creditors would need to have full visibility of losses and cash flows ahead of committing to funding, so it could be likely that the path out of bankruptcy is now known.

 

Need to do more research on the terms etc. though, and work out the equity value. A key point would be the previous bond terms interest rate and the new bond terms which i don't believe are disclosed. However, "far superior" terms could mean an interest rate reduction of 25%-50%. Could they be guaranteed by Cali'?

The California legislature has provided and is likely to provide more implicit but conditional support. Despite popular backlash, oldco is likely to continue to play the regulatory capture game, an area where they still possess a relative edge.

 

I find the debtors have done a decent job, with nature cooperating. Adversaries have come and include the Elliott Group and the aim of the vulture group is to get their part of the flesh but their true intents may become all too apparent at times (see docket 4119, exhibit A).

https://restructuring.primeclerk.com/pge/Home-DocketInfo

 

It seems like the Judge may appreciate the superior value of the way to deal with subrogation claims, as described by the debtors. Interestingly, from what I can gather from public disclosures, Baupost has been able to buy various subrogation claims over time (total value about 2.6B, bought at around 30 to 35% of 'face' value) and they would recover 11/20B under the proposed plan. One has to deduct an uncertainty premium and the value of time but Baupost (which remains a large holder of common equity), at least on that level, would do very well with their 'distressed' subrogation claims.