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PG&E Plunges Into Crisis as It Faces Reckoning Over Fires

Jim Efstathiou Jr., Molly Smith and Allison McNeely

(Bloomberg) -- California’s biggest utility was plunged into full-blown crisis by the possibility that its equipment sparked one of the catastrophic wildfires ravaging the state.

Shares of PG&E Corp. plummeted as much as 32 percent Wednesday after the company said it had exhausted its revolving credit lines, signaling it was shoring up its cash to prepare for a possible credit downgrade to junk. The utility’s filing also may have marked the start of a campaign to get bailed out by California’s lawmakers -- as it was after last year’s fires.

“Watching this whole thing play out, it’s like a slow motion train wreck,” said John Bartlett, utility portfolio manager at Reaves Asset Management. “If California wants solvent utilities, the legislature needs to go back to the drawing board.”

PG&E has a total of $3.46 billion in cash and cash equivalents, and another $1.4 billion in wildfire insurance coverage, according to regulatory filing Tuesday. Damages from the deadly Northern California wildfire may reach as much as $15 billion, Citigroup Inc. analyst Praful Mehta wrote in a research note Wednesday.

In a statement, PG&E said it drew down its credit facility “to provide greater financial flexibility, including to pay down upcoming debt maturities and for general business purposes.”

It’s the fifth consecutive day of declines for San Francisco-based PG&E, which has lost about half its value since the Camp Fire broke out Nov. 8. The company’s widely traded 6.05 percent senior unsecured bonds due March 2034 fell to 90.75 cents on the dollar, according to Trace data compiled by Bloomberg.

California authorities are investigating PG&E equipment as a possible cause of the Camp fire, the deadliest blaze in state history, burning about 150 miles (240 kilometers) northeast of San Francisco. It has killed at least 48 people, destroyed 130,000 acres and wiped out the town of Paradise.

“The utility could be subject to significant liability in excess of insurance coverage,” PG&E said in its filing Tuesday.

PG&E already faces up to $17.3 billion in potential liabilities for 2017’s wildfires, according to a JPMorgan Chase & Co. estimate, bringing the total to about $30 billion. That well exceeds the company’s current market value of $12.6 billion.

By tapping its credit lines, the utility may be trying to improve its cash position in order to meet obligations that would arise if its credit rating is lowered to high yield from BBB, the second-lowest rung of investment grade, according to credit analysts.

“It’s not unusual for downgrades to come fast and furiously in situations like this, so a downgrade to below investment grade is certainly a real possibility,” Gimme Credit analyst Carol Levenson said in an email.

If that happens, the company would be required to post cash as collateral to guarantee contracts with providers who supply it electricity. That amounts to about $800 million, according to filings.

PG&E also faces $750 million in near-term debt maturities that it will need to pay. A downgrade to junk would limit its access to the commercial paper market for funding, Citi analyst Praful Mehta said in a report.

PG&E will likely use a bankruptcy threat again as a way to get legislative aid, Gimme Credit’s Levenson said. (PG&E entered bankruptcy in 2001 after incurring $9 billion in debt by buying power for more than it could charge customers. It emerged three years later.)

A California law passed this year, known as SB901, allowed PG&E to use state-authorized bonds to pay off lawsuits from the 2017 fires and gave utilities a mechanism for recovering some wildfire costs starting next year, so long as the fires weren’t caused by company negligence. But it didn’t specifically address how to handle the costs of any fires their equipment might trigger in 2018.

The legislation also didn’t change how California applies “inverse condemnation,” a legal doctrine under which the state’s utilities can be held liable for any economic damages tied to their equipment, even if they follow all of the state’s safety rules. That’s left the utilities exposed to open-ended liabilities.

Letting PG&E lapse into bankruptcy would cause problems for California beyond the wildfires, said Nicholos Venditti, portfolio manager at Thornburg Investment Management, which holds some of the utility’s municipal debt. PG&E has “fairly decent cash flow” and has taken steps in the past to avoid it, such as cutting dividends, he said.

“PG&E‘s fate largely will be determined on how lenient the California legislature is with power providers and whether or not they allow them to pass on these costs to ratepayers," Venditti said. “There are only so many $15 billion liabilities the company even of this size can withstand.”

(Updates with comment from analyst in third paragraph.)

--With assistance from Joshua Fineman, Mark Chediak, Brian Eckhouse, Christopher Martin and Romy Varghese.

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net;Molly Smith in New York at msmith604@bloomberg.net;Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story: Joe Ryan at jryan173@bloomberg.net, Will Wade

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