PCG PG&E Corporation

Top regulator raises possibility of breakup in light of wildfires; accountability faulted

By Russell Gold and Katherine Blunt 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 16, 2018).

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, including whether it should be broken up.

"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.

Later, in an interview with The Wall Street Journal, he said was concerned about how PG&E handled safety operations, including its transmission lines that have sparked wildfires in recent years. He said the company's decision to compensate its former chief executive after PG&E was found negligent for a large 2010 gas explosion that killed eight people as well as its failure to replace its board "left us wondering is anyone ever accountable for failing to provide safety at PG&E."

He added: "I am very concerned that they don't have accountability in place."

He said his expanded review of the company could include whether to break it up into smaller utilities. "We will put all these things on the table," Mr. Picker said.

The commission had begun a review of whether PG&E's "organizational culture and governance prioritize safety" in 2015.

Meanwhile, Moody's Investors Service on Thursday evening downgraded the ratings of PG&E 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.

"It's important to remember that the cause of the fire has not been determined," PG&E spokeswoman Lynsey Paulo said in a statement. "We will cooperate with any investigations, and support the development of best practices and new policies to help prevent wildfires and protect the public."

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."

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 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.

Corrections & Amplifications An earlier version of this article incorrectly referred to PG&E Corp. as PGE Corp. in one instance. (Nov. 15, 2018)

Write to Russell Gold at russell.gold@wsj.com

(END) Dow Jones Newswires

November 16, 2018 02:47 ET (07:47 GMT)

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