PG&E’s stock (PCG) crashed 48% this morning after reports that the CEO resigned yesterday and the company will be filing for Chapter 11 bankruptcy. California law mandates notification of intent must be made at least 15 days prior to filing, so we can “expect it to become official” on January 29th. We’ll come back to that in a minute.
“PG&E expects that the Chapter 11 process will, among other things, support the orderly, fair and expeditious resolution of its potential liabilities resulting from the 2017 and 2018 Northern California wildfires, and will assure the company has access to the capital and resources it needs to continue to provide safe service to customers” – PG&E
Typical corporate speak for a public announcement. Governor of California Gavin Newsom essentially said the exact same thing. Oh, the company did forget to publicly mention one thing that the privately disclosed to SEC…
“Williams (CEO) will receive severance. That payment will likely be $2.36 million to $4.46 million, depending on how her departure is categorized, according to the firm’s most recent proxy statement (8-K). She also has $3.1 million of pension benefits that may be in flux if the firm enters bankruptcy court. She was paid $8.6 million in 2017” – Bloomberg
Maybe they’re just getting better at cherry picking what to say to the public. In all fairness, they probably picked up some pointers when they first filed for Chapter 11 in April 2001. Without getting into the details (Google it) PG&E emerged just fine 3 years later. Most people understandably don’t know what Chapter 11 means, so the quick answer is that it means that the company is “restructuring” to get out of debt aka it’s working out a payment plan. While they figure out how to pay all of this crap off (about $30 billion in liabilities), nobody can touch them. They also don’t have to pay interest to any of those bond holders they hiked up their rates for.
Here’s what the SEC’s says about Chapter 11: “During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”
OK…that was boring. Obviously, the first thing you have to know, is they don’t pay anybody anything (well, except for that CEO that’s leaving). Everything is essentially frozen. Then they come up with a payment plan to get out of debt (which must be agreed upon and approved in court). If that doesn’t work out, the assets are going to get divided up so that ideally everybody get paid off. The hierarchy of who gets paid first goes like this
- Taxes (paid first, of course)
- Secured Debt (loans they took out and posted collateral for)
- Unsecured Debt (the majority of bondholders and those liability claims)
- Preferred Stock Holders
- Common Stock Holders
We’re going to go ahead and guess that 90% of you don’t know what preferred stock is, so when we talk about stock we’re talking about common stock. Stock owners are on the lowest rung when it comes to getting their money back when things go to sh*t.
So the current situation looks like this: PG&E doesn’t have to pay anybody anything. The CEO will get millions in severance. People who are “customers” still have to pay the higher rates that state approved in 2017. Another rate hike may be coming if the state approves it. California may also decide to go with a form of a statewide tax bailout like it has in the past (2001)
So that means there is something that is still POSSIBLE…not likely, but possible. That PG&E is basically bluffing and that California will announce a further form of bailout before the bankruptcy actually goes into effect. While both the company and the state have both publicly stated that they see no other option than bankruptcy, remember how back in November the state head of public utilities commented that he couldn’t foresee the possibility of letting the company go bankrupt? Then the stock shot up about 37%?
As of writing, shares are trading at $8.20. That means the company is still priced at about $4.25 billion. Moody’s and S&P dropped PG&E’s credit ratings to junk last week, but several levels higher than their credit rating was in 2001 when this happened (Moody’s Baa vs Caa2). Bonds are still trading in the 75-85* range vs 55 back in 2001. Imagine, what happens when the markets price for bankruptcy and California even mentions some form of bailout or further protection. Obviously, some investors are betting on exactly that. We sure as hell aren’t saying that this bankruptcy won’t take place, but remember it’s not official for 15 more days.
*Bond pricing is based off $100 par value (which is actually $1000 …yea, bonds are confusing). So $75-$85 means the bonds are trading at a 15-25% discount to what they would trade for if the company was in good shape.
NOTE – Here’s a stupid, but effective way to remember the bankruptcy hierarchy. Tea Soup for the Commoners. TSUPC.
Tea (T for Taxes) Soup (SUP – Secured, Unsecured, Preferred) for the Commoners (Common stock holders).
PG&E Was A Hedge-Fund Darling. That Bet Flopped (WSJ – A Must Read for Investors)
California lawmakers traveled to Hawaii with utility executives as wildfires raged
(Fox News – the only popular conservative site we found with any news on PG&E)
PG&E bonds fall; Calif. outlook cut (MarketWatch 2001 Article)