Bankruptcy Fears Boost PG&E Shareholders' Uncertainty

We are putting our PG&E PCG fair value estimate under review as we conduct a scenario analysis of the company's equity value in bankruptcy.

We expect PG&E to declare voluntary Chapter 11 bankruptcy by Jan. 29 based on a regulatory filing posted Jan. 14. Two of the three major rating agencies cut PG&E's credit ratings to below investment grade last month, and its bonds have been trading at distressed prices. CEO Geisha Williams has resigned.

We plan to cut our $30 fair value estimate by more than 50%, but we still believe there is positive equity value. The key uncertainty is how much equity value will be lost after PG&E pays potential claims and fines related to the 2017 and 2018 wildfires. We estimate the only scenario with no residual equity value is if PG&E is required to pay $30 billion or more of liabilities. This is the high end of reported forecast liabilities. We previously assumed $10 billion of pretax losses on a probability-adjusted basis.

In the near term, PG&E appears to have enough liquidity to retain equity value through 2019. The company reported it has $1.5 billion of cash available and plans to raise $5.5 billion of debtor-in-possession financing. The critical question is whether PG&E can cut back its $6.4 billion of planned capital investment in 2019. We estimate funding that entire investment plan would use up most of its liquidity. Cutting back some of its growth investment could allow PG&E to maintain sufficient liquidity through early 2020.

We plan to maintain our no-moat and very high uncertainty ratings. In the end, California regulators and politicians will have to balance PG&E's financial health with customer costs. PG&E's higher cost of bankruptcy financing is likely to lead to higher customer bills unless stakeholders reach a quick solution that restores market confidence. We think a speedy resolution is unlikely.

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