PG&E Declines San Francisco Bid, Preferring Bankruptcy to Municipal Ownership

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Since filing for bankruptcy protection in January, PG&E Corp. (NYSE: PCG) has been acutely focused on legislation pending in the state legislature that would have allowed the company to issue tax-free bonds that would help pay for billions of dollars in liabilities related to 2017 and 2018 wildfires that were caused by PG&E’s equipment. The legislature adjourned for the year before considering the proposal that would have permitted the company to issue some $20 billion in bonds backed by future profits.

The company is expected to file its bankruptcy reorganization plan Monday, September 9, a plan that had included the proposed bonding authority. The bonding proposal now waits until the state legislature reconvenes in January 2020.

The setback was met with something less than humility by PG&E management. The company rejected an offer from the city of San Francisco to purchase the company’s electricity distribution and transmission assets inside the city for $2.5 billion. PG&E also rejected a smaller offer of $116 million from a central California irrigation district to purchase hydroelectric assets.

San Francisco’s offer was rejected by the company because PG&E “doesn’t believe ‘municipalization is in the best interests of our customers and stakeholders’,” according to a Bloomberg report. The irrigation district’s proposal was rejected for being “significantly below the actual value” of the assets.

San Francisco Mayor London Breed and City Attorney Dennis Herrera said in the city’s offer letter that the purchase price represented a “2.5x multiple of estimated year end 2019 rate base and more than 35x multiple of estimated 2019 earnings.” PG&E did not dispute that, choosing instead to take a stand against municipal ownership of utility assets.

The IBEW union local representing PG&E workers agreed with the company: “It is our opinion that the offer is extremely low, that San Francisco is probably not capable of running a complex network, and that the city has many pressing problems that should take priority over buying electric system.”

From a consumer’s perspective, the city’s offer represents a benefit to San Francisco residents and a significant drawback to other PG&E customers. The city has no wildfire risk, which means that the company’s other customers would be on the hook to assume that risk without any premiums spread among the city’s nearly 150,000 households and nearly 35,000 business customers. Eliminating that many customers from PG&E’s customer base may not leave the company with an economically viable system.

Last month, PG&E revealed that two hedge funds that currently own nearly 8% of the company’s stock have a plan to raise $15 billion through a rights offering. People affected by the wildfire also may support the company provided that the restructuring plan includes a sufficiently generous payment for their outstanding claims. As yet, no dollar amount has been associated with those claims.

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