By Russell Gold and Katherine Blunt
A California regulator said late Thursday that it was expanding
a probe of PG&E Corp.'s safety practices to explore the way the
company is managed and run, opening the possibility that the state
may mandate changes in the utility's corporate structure and
operations.
"I will open a new phase examining the corporate governance,
structure, and operation of PG&E, including in light of the
recent wildfires, to determine the best path forward for Northern
Californians to receive safe electrical and gas service in the
future," Michael Picker, the president of the California Public
Utilities Commission, said in a statement.
The commission had begun a review of whether PG&E's
"organizational culture and governance prioritize safety" in 2015.
A spokesman for the commission didn't immediately respond to
requests for comment on its president's statement Thursday
night.
Meanwhile, Moody's Investors Service on Thursday evening
downgraded the ratings of PGE Corp.'s debt, as well as the
long-term ratings of the company's main utility subsidiary, Pacific
Gas & Electric Co, and said all of the ratings for both are on
review, which could result in a multi-notch ratings downgrade.
The developments capped a wild trading day in which shares of
PG&E fell for the sixth straight day, then rebounded in
after-hours trading, as investors grappled with the volatility that
now comes with owning California's largest utility.
PG&E shares fell more than 30% to close at $17.74 on
Thursday amid investor concerns that the utility, already facing
huge potential liability costs from 2017 wildfires, could be hit
with even more costs related to a current fire in Northern
California that has become the deadliest in state history, killing
more than 50 people.
But the shares then shot up and recovered after hours in a
roller-coaster ride for investors.
PG&E has disclosed that a problem occurred on one of its
high-voltage power lines in Northern California 15 minutes before
the start of the Camp Fire was reported in the area Nov. 8. No
definitive connection between the line outage and the fire has been
made, and California fire investigators will likely take months to
make a final determination.
Still, the company's stock has been on a downward trajectory
over the past six days as concerned investors confront yet another
fire-related risk for the company, which is already grappling with
more than 800 civil lawsuits from the 2017 fires. State
investigators have concluded that PG&E equipment helped spark
at least 16 of those fires last year.
PG&E said it "wasn't going to speculate or comment on what
factors may or may not be impacting the stock market."
"This is the new normal," said Michael Wara, head of the climate
and energy policy program at Stanford University's Woods Institute.
"Investors believe and are pricing in and acting as if PG&E
will lose a few billion every year because of wildfire
liability."
Mr. Wara said equity analysts estimate PG&E could face more
than $10 billion in lawsuits and fines from fires in 2017 and from
the Camp Fire this year. The company only has about $1.4 billion in
insurance coverage for fires and about $13.2 billion in annual
revenue from electricity sales.
Thursday's drop was the worst in the S&P 500, and the
preliminary trading volume was the highest on record for the
company. The steep fall in PG&E shares suggests investors
believe the company may be forced to file for bankruptcy
protection, a move that would almost certainly wipe out
shareholders.
The outlook for bond investors is more complicated. Many
PG&E bonds were trading at discounts to their par value,
indicating some concern about the company's prospects. But, in
general, the selling was less intense in the bond market, as many
bond investors expect the company to be able to largely pay its
debts regardless of what happens with wildfire-liability
claims.
The price of PG&E's most active issue, some $3 billion in
6.05% bonds which mature in 2034, gained more than 3 cents Thursday
to 92.5 cents on the dollar, according to MarketAxess. Other
PG&E bonds, which had been trading at distressed levels, also
saw gains. The company's 4% bonds due in 2046 were up almost 4
points to 77.25 cents on the dollar.
Earlier this week, PG&E drew down its full bank line of
credit, a move many analysts saw as a sign its access to debt and
equity markets might be limited. "It's unclear whether the company
will have access to the capital markets at this time," said Jeffrey
Cassella, an analyst with Moody's Investors Service.
Despite the uptick in its bond prices Thursday, PG&E Corp.,
the parent of the utility, will be shut out of the market for
plain-vanilla bonds because it is now clear that highly destructive
wildfires may be an annual event, said Andrew DeVries, a high-yield
bond analyst at CreditSights. That raises the risk that lawsuits
related to the wildfires would become a regular occurrence, he
added.
The company's financial situation has led to speculation that it
might need a bailout of some sort from the state of California. "As
the company's cash position diminishes, the risk of bankruptcy
could increase unless politicians intervene," wrote Mizuho
Securities USA LLC analyst Paul Fremont.
Earlier this year, California passed legislation that would
allow utilities to securitize wildfire liability by floating bonds
and passing on the costs to ratepayers under certain circumstances.
But the law takes effect in January, leaving utilities exposed to
liabilities that could occur as a result of fires in 2018.
Citi analyst Praful Mehta said the stock selloff reflects
investors' concerns that California might not act to help PG&E
offset potential liability costs arising this year if the move is
viewed as a bailout. "Politically, it could be very challenging,"
he said. "If the political will isn't there, the only way this
could get resolved is to push it into restructuring."
Utility stocks are usually seen as somewhat boring investments
that deliver predictable dividends. But PG&E has become a stock
without a dividend or the prospect of one for the foreseeable
future. The company cut the dividend earlier this year to preserve
cash in anticipation of mounting liability costs after the 2017
fires.
"It's usually considered a safe investment," said David Spence,
a professor who teaches energy law at the University of Texas,
referring to PG&E stock, "but it's not looking very safe right
now."
--Sam Goldfarb, Patrick Thomas and Soma Biswas contributed to
this article.
Write to Russell Gold at russell.gold@wsj.com
(END) Dow Jones Newswires
November 15, 2018 20:15 ET (01:15 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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