The market has never quite given up on shareholders retaining some value in the restructuring of PG&E (PCG 0.61%), the bankrupt utility that serves most of Northern California. The company had billions of dollars in liabilities after forest fires were tied to it, and the utility chose bankruptcy as the best way out.
In court, the company has proposed restructuring that would compensate victims of the forest fires, creditors, and public institutions without completely wiping out equity holders. That's why the stock still trades with a $5.4 billion valuation. As the company finalizes restructuring, here's what to look for.
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What to expect during bankruptcy
Under California law AB 1054, PG&E can tap into a wildfire liability fund that aims to quickly pay victims of fires. The catch is that the company has until June to exit bankruptcy, putting some urgency in the process.
Current reports have PG&E paying $20.4 billion to wildfire victims, including for insurance claims. That's a lot of money, but remember that less than a year ago, the company had an enterprise value of over $40 billion, and debt was $22 billion before bankruptcy.
We don't yet know what stockholders will get in the bankruptcy settlement, but right now the market is expecting them to end up with something. That doesn't make the stock a great buy, but it's the reason shares are trading above zero today.
What to expect after bankruptcy
There may not be a utility in the U.S. being disrupted by renewable energy and climate change more than PG&E is. California set a target for 100% renewable energy by 2045, which will require a massive transformation in both generating assets and infrastructure. But that's where the opportunity is for PG&E post-bankruptcy.
Customers in California are clamoring for cleaner forms of energy like solar and wind, and have been the quickest to adopt electric vehicles. Starting next year, the state will even require new homes to have solar panels. Energy changes like customers producing their own energy have long been viewed as a threat to utilities, but PG&E may have no choice other than to view it as an asset.
The utility should be finding ways to own the rooftop solar and energy-storage systems being installed in homes. It can be the financing arm for a partnership with installers like SunPower and Sunrun, which both have large operations in its market. PG&E wants to own energy production and management assets, even if they're not under the regulated arm of the business, and it'll likely find a way to do so through solar.
Another huge opportunity is electric vehicle (EV) charging infrastructure. PG&E has tried to get regulators to approve chargers under its regulated business, which would spread the cost among all ratepayers. But PG&E has an incentive to build a charging business whether it's regulated or not. The company would be selling its own electricity and could collect a fee for the charger portion of the business. I think we'll see innovations in the charging business model, even if PG&E happens into it by necessity.
A new kind of utility
PG&E is going to have to adapt to the new energy environment more quickly than most in the U.S., and that means adopting more wind and solar resources, and building energy storage and EV charging infrastructure. That's a big challenge, and the company will have to figure out the right structure for both regulated and unregulated assets.
I think a decade from now, we'll see a new kind of utility that's rapidly adapting to both energy demand from customers but also energy production and resources from the home (rooftop solar and energy storage). The opportunity to play the intermediary that makes the grid work effectively will be a big one for PG&E. It can't fight the trends taking place in energy, so it might as well go along with them and find the best way to add value for customers and investors long term.
