THE lights would stay on if California utility giant PG&E Corp. files for bankruptcy. But the company, its customers and investors would be set for years of uncertainty.
While utility bankruptcies are rare, they can result in anything from a healthy company to a breakup, with business units sold off like spare parts. For consumers, the fallout likely means higher rates.
PG&E plunged 22 percent on Monday on news that it’s exploring a bankruptcy filing in response to an onslaught of wildfire liabilities estimated to be as high as $30 billion—far exceeding the company’s market value of less than $10 billion. On Tuesday, the company fell as much as 17 percent after S&P Global Ratings downgraded the San Francisco-based company’s long-term credit rating to junk, and said the utility remains on a negative watch. The bonds hit all-time lows.
A potential bankruptcy is seen as putting pressure on California lawmakers to provide a bailout and avoid more turmoil for the state’s largest utility. Whatever the outcome, bankruptcy tends to be “massively inefficient,” said Severin Borenstein, an energy economist at the University of California, Berkeley.
“It freezes the company,” he said. “A judge who has no expertise essentially becomes the CEO. And there are these committees that get involved in every corporate decision.”
PG&E has faced bankruptcy previously.
Its Pacific Gas and Electric utility filed for bankruptcy in 2001 as soaring wholesale power prices and rolling blackouts threw California into crisis. The PG&E Corp. holding company itself never filed for bankruptcy. The utility emerged three years later, its business intact. Under the reorganization plan, ratepayers were responsible for $7.2 billion of the company’s debt from the electricity crisis.
Bankruptcy filings tend to be rare for electric utilities because they have large and steady revenue streams. But there have been other cases. El Paso Electric, for example, filed for Chapter 11 in 1992, due largely to expenses tied to the Palo Verde nuclear plant. The Texas company exited bankruptcy court four years later with a new rate plan that let it recoup its costs.
A PG&E bankruptcy isn’t “likely” at this time as the company can tap other sources of cash, either through the sale of its natural gas unit or other real estate, or a cut in its $5.5-billion capital spending plan, analysts at Mizuho Securities USA Llc.led by Paul Fremont wrote in a research note on Tuesday. Fremont cut his price target on the shares to $19 from $27.
“There are other sources for cash the company can rely on to avoid bankruptcy,” Fremont said in the note.