PG&E Corp. (PCG, Financial) is facing an imminent liquidity crisis that could bring its shares close to zero. Since it is a utility, it will probably ultimately be bailed out by taxpayers, so zero is an asymptote and the power giant won’t be completely worthless. But as we saw with the bailout of American International Group (AIG) 10 years ago, shares could ultimately lose over 99% of their value from pre-California wildfire levels.
Here’s how things are shaping up. As of its latest quarterly report, PG&E had $430 million on its balance sheet. This was before the wildfires broke out, so it could be lower now. CNBC already reported on the $30 billion in wildfire liabilities last week, but that’s not going to push the utility giant into an immediate liquidity crisis, as payouts would be over time. What might do it, though, is yesterday’s downgrade of PG&E to junk by Moody’s. Together with S&P’s downgrade to junk, this will trigger the following clause in PG&E’s last 10-Q (page 28):
"The majority of the Utility’s derivatives instruments, including certain power purchase agreements, contain collateral posting provisions tied to the Utility’s credit rating from each of the major credit rating agencies, also known as a credit-risk-related contingent feature. The Utility’s credit rating remains investment grade. If the Utility credit rating were to fall below investment grade, the Utility would be required to post additional cash immediately to fully collateralize some of its net liability derivative positions."
Well, its credit rating has fallen below investment grade, so it is now required to post additional cash immediately for collateral. How much? That’s not immediately clear. The same 10-Q does, however, give a maximum possibility:
"If S&P Global Ratings and Moody's Investors Service, Inc. downgraded the Utility below investment grade, the Utility estimates it would be required to fully collateralize up to $800 million in net liability positions."
If the maximum $800 million were triggered, PG&E would already be in a bona fide liquidity crisis. However, the report goes on to say that as of Sept. 30, only $12 million would have been needed to be put up immediately had the credit rating been cut to junk back then. Has that situation changed?
It may not matter much. PG&E has $500 million in principle debt due this year and another $1.4 billion in debt due in 2020. With less than half a million dollars on its balance sheet and its corporate bonds cratering, PG&E won’t have an easy time attracting more investors to roll over that debt. An equity financing is out of the question.
The only option short of a taxpayer bailout would be short-term financing. PG&E has already requested the California Public Utilities Commission to extend its maximum debt limit to $6 billion from the current $4 billion, but the state agency has not authorized that yet, nor did it give the company an expedited review as requested. As of Sept. 30, PG&E had only $193 million in short-term debt, so there is still room for it to issue more to cover collateral costs. The problem is, who would buy the debt?
In the meantime, PG&E shares keep cratering and may have quite a way to fall before the numbers are sorted out. If short-term financing doesn't work out, we'll find out soon just how much taxpayers could be on the hook for.
Disclosure: No positions.
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