Pacific Gas and Electric PIPE
Third Pointâs involvement in PG&E (PCG, Financial) began in late 2018, when the Companyâs bonds traded to distressed levels following the tragic Camp Fire. The Companyâs bankruptcy filing was prompted by the need to access liquidity and settle outstanding wildfire claims in an organized manner. We believed PG&Eâs core business remained in a strong position reflecting a classic âgood business/bad capital structureâ restructuring and made it the firmâs largest distressed position. By early 2020, the company reached an agreement to restructure the business and as part of that exit plan, the company needed to raise approximately $26 billion in new capital including $9 billion in new common equity. The exit financing was used to settle insurance and victimsâ claims relating to the 2017 and 2018 wildfires, repay some pre âand postâpetition creditors, and contribute to the new Wildfire Fund.
Third Point participated in the common equity offering as a cornerstone PIPE investor. PG&E is the 6 th largest U.S. utility by rateâbase and has no unregulated exposure. The bankruptcy addressed the companyâs outstanding legacy liabilities and repositioned the balance sheet for investment and growth. PG&Eâs fundamentals position it at the high end of the utility industry, with equity rate base growth of approximately 8% and EPS growth of 8â12% driven by strong investments in infrastructure to serve customers safely and reliably while also reducing the companyâs carbon footprint and providing customers with energy choice. Yet PG&Eâs valuation is a fraction of its peers: it trades at under 8x 2022 earnings versus the regulated utility peer set at 18x. The shares have traded poorly (down ~5%) since exiting bankruptcy due primarily to technical factors that are extremely common in these situations. We expect this sharp discount to diminish as the company goes through the normal process of finding an institutional shareholder base, as well as hires a permanent CEO and continues to address prior operational deficiencies.
Alternatively, some attribute the extreme discount to peers to potential wildfire risk but the regulatory regime has substantially changed since PG&E filed for bankruptcy. In addition to restructuring the balance sheet and addressing past liabilities, emergence from bankruptcy allows PG&E to fully access the elements of the enhanced wildfireârelated regulatory framework under AB1054. The largest component of this is the new Wildfire Fund, which provides all investorâowned utilities in California an insurance policy to address future catastrophic wildfire claims in a timely fashion. Funded to withstand 10+ years of potential wildfire liabilities, the Wildfire Fund provides a threeâyear rolling cap on shareholder liability estimated by PG&E at around $2.4 billion, which only applies if the utility fails to act prudently.
Most important, however, is PG&Eâs focused commitment to an investment in wildfire safety. The company is spending approximately $3 billion per year to reduce wildfire risk through system hardening, vegetation management, and enhanced inspections. The company has also invested in weather stations and cameras to spot potential fires early and sectionalized the grid to reduce customer disruptions caused by the Public Safety Power Shutoff process. In addition, the company has started to adopt state âofâtheâart technology such as drones provided by Third Point Venturesâ portfolio company PrecisionHawk and is partnering with Palantir to use AI for further risk mitigation and network efficiency. On a positive green note, the company also recently announced a partnership with Tesla to build a lithiumâion battery storage system. These investments and PG&Eâs commitment to ESG best practices should reduce environmental risk over time, while the Wildfire Fund should protect the stateâs investorâowned utilities who act responsibly on climate change.
From Daniel Loeb (Trades, Portfolio)'s Third Point second-quarter 2020 investor letter.
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