The financial woes of investor-owned utility PG&E could indirectly cheapen municipal high-yield debt, according to a municipal research firm.
PG&E could face billions in liabilities related to its alleged role in sparking some of the massive forest fires that have plagued the state over the last two years.
In late December, the state insurance commissioner
Multiple news outlets have reported this week that PG&E has been contemplating filing Chapter 11 bankruptcy as soon as February. It would be the company's second bankruptcy. It filed for Chapter 11 in 2001 following an electric power supply crisis.
The company “does not comment on market rumor or speculation,” spokesman Andy Castagnola wrote in an email.
The electric utility’s CEO Geisha Williams first raised the specter of filing bankruptcy protection last summer.
PG&E has roughly $18 billion of corporate debt outstanding, “so sweeping downgrades to junk and/or a bankruptcy filing would mean $18 billion more debt into the corporate high yield space, possibly widening spreads,” said Matt Fabian, a partner with Municipal Market Analytics. “Muni yield prices are indirectly affected by corporate yield prices, because for at least some buyers, they are investment alternatives to each other.”
Because it is an indirect vector, such problems should be a minor influence on the tax-exempt high-yield side, Fabian said.
If PG&E were to file for bankruptcy protection, Fabian said, it would disrupt a large portion of the California power market, potentially pushing power costs higher, slowing growth and/or affecting state and local revenues.
“Replacement of PG&E with another provider could wind up permanently increasing the cost of power for state customers,” Fabian said. “Those are medium-term negative credit factors that, were this a different market, might affect California bond prices.”
In theory, Fabian wrote in his weekly outlook, this represents another incremental threat to California portfolios, but it is hard to worry too much about California bond performance when the state’s bonds are carrying “strength to spare.”
Gov. Gavin Newsom, in a press conference shortly after taking the oath of office Tuesday, emphasized the need to prioritize prevention in the wake of November's Camp Fire that destroyed the town of Paradise and the deadly Wine Country fires of 2017.
“It’s not a coincidence that my first full day as governor is focused on emergency preparedness. It’s deliberate, it reflects intentionality, and it speaks to the priority that I place on emergency preparedness, response and recovery,” Newsom said.
He proposed a $105 million increase in wildfire safety funding on top of the $200 million already allocated for forestry management by the Legislature last fall for a total of $305 million.
The governor also plans to ask the Legislature to boost funding for fire safety needs such as helicopters, remote infrared cameras to detect fires and better alert systems.
Former Gov. Jerry Brown signed Senate Bill 901 in September, which allows the California Public Utilities Commission to authorize, under certain circumstances, the issuance of rate reduction bonds by the California Infrastructure and Economic Development Bank. The thrust of the bill was to reduce the shock to ratepayers of damages paid by utilities for the 2017 fires.
The deadliest fire of 2017, the Tubbs fire that killed 22 in and around Santa Rose, remains officially under investigation, but the California Department of Forestry and Fire Protection determined that
The CPUC has to find that the wildfire damage costs are just and reasonable before authorizing an electrical corporation to issue rate recovery bonds to finance costs. The financing provision does not cover the cost of fines and penalties.
The Legislature would need to grant additional approval for PG&E to benefit from rate reduction bonds if its equipment is deemed responsible for last year’s Camp Fire, the deadliest in the state’s history.
S&P Global Ratings downgraded the issuer rating of utility holding company PG&E and its subsidiary Pacific Gas & Electric to a junk B rating from an investment grade BBB-minus Tuesday and lowered the short-term rating on both entities to B from A-3. The rating agency also maintained the ratings on CreditWatch with negative implications, a status S&P had placed on the ratings on Nov. 15.
“The CreditWatch with negative placement reflects what we see as the souring political and regulatory environment and our view of the limited options that the company has to effectively manage its operating, financial and regulatory risks,” S&P analysts Gabe Grosberg and Rebecca Ai wrote in the report.
The downgrade also reflects the company’s recent announcement that its board of directors is reviewing PG&E’s management, finances, governance and structure options, the analysts wrote.
“Since the devastating Camp Fire, the California Public Utilities Commission has opened a proceeding to consider potential penalties against the utility for the alleged falsification of natural gas safety records,” according to S&P.
The inquiry has created an air of distrust with political and regulatory officials of the company, which may “significantly limit the company’s options including its ability to consistently finance or safely operate its businesses,” S&P analysts wrote.
“Previously, we assumed that given California’s robust renewable portfolio standards and the increasing risks of climate change, legislators and regulators would proactively work with the utility to preserve credit quality to achieve these goals,” analysts wrote. “However, based on recent developments, we no longer believe this to be true given the utility’s own missteps.”
S&P said it expects the air of mistrust combined with media speculation about a bankruptcy will limit the company’s access to the capital markets, potentially limiting the company to only being able to issue secured debt, restricting its financing options relative to its peers.
“We could lower the rating one or more notches over the next few months if explicit steps are not taken by politicians or regulators to improve the regulatory compact despite the company’s own missteps,” S&P analysts wrote. “We could also lower the ratings by one or more notches if management does not clearly articulate specific steps it will take to preserve credit quality over the long term.”
The utility company could be using the specter of bankruptcy to “influence the state into relieving the company of some of its hypothetical liability to the wildfires,” Fabian said.
“A bankruptcy would be disruptive and expensive enough perhaps to deter California from being as aggressive or punitive against PG&E as it otherwise might,” Fabian said. “It’s not a bad strategy, since it’s hard to see any party in California believing that a PG&E bankruptcy is a good idea.”
