(Reuters) - Shares of embattled utility PG&E Corp (PCG.N) surged 37 percent on Friday as fears it could be bankrupted by potential liability from California’s deadliest-ever wildfire were assuaged by signs of support from a regulator.
Employees of Pacific Gas & Electric (PG&E) work in the aftermath of the Camp Fire in Paradise, California, U.S., November 14, 2018. REUTERS/Terray Sylvester
GRAPHIC: Fire Fear - tmsnrt.rs/2PyMu9a
Bloomberg on Thursday reported the head of the California Public Utilities Commission (CPUC) as saying he could not imagine allowing the state’s largest utility to go into bankruptcy.
The CPUC issued a statement emphasizing that state law requires it to consider a utility’s financial health when weighing a request to cover costs associated with wildfires.
The regulator also said it would start investigating PG&E’s corporate governance, structure and operation in the light of the fires, pointing to a possible break up of the company.
The regulator’s statement came after PG&E’s stock slumped over 60 percent since last Thursday, when the Camp Fire destroyed the northern California town of Paradise a week ago and killed at least 63 people, making it the deadliest and most destructive wildfire in state history.
Investors have feared that without help from California’s government, PG&E could go bankrupt should it eventually be found responsible for the fire. Even after Friday’s rebound, the stock remains down 50 percent from before the Camp Fire started, erasing nearly $13 billion in market capitalization.
Reacting to the CPUC’s statements, Citigroup on Friday upgraded PG&E’s stock to “buy” from “neutral”.
“Given the reaction in the stock market, we think there was an appropriate level of urgency that something needed to be done,” Citigroup analysts wrote referring to the regulator’s statement.
GRAPHIC: PG&E shares surge after Thursday's close on utility regulator's comments - tmsnrt.rs/2QNMYF1
Price gains on PG&E’s more than $18 billion of bonds ranged from around 1.5 to 11.25 points, and their yields, which move in the opposite direction to bond prices, fell broadly.
The biggest increase was seen in the company’s bond due in March 2034 694308GE1=RRPS, which gained more than 11 cents on the dollar to trade back above par value at 103.75. Its yield dropped more than 1 percentage point to 5.68 percent from 6.84 percent late on Thursday.
The company’s debt had come under broad pressure earlier this week after the utility borrowed $3.3 billion under its credit lines and warned it could face liabilities in excess of its insurance coverage should its equipment be found to have caused the fire.
The gains in bond prices came even after both Moody’s Investors Service and Standard & Poor’s cut their credit ratings on PG&E late Thursday to just one notch above junk bond territory and said the outlook remained negative.
Fitch Ratings on Friday also downgraded the utility’s long-term issuer default ratings to “BBB-“ from “BBB” and placed it on “rating watch negative”.
With the collapse in its bond prices this week, most of PG&E’s bonds had been trading as though they were already speculative-grade securities, although Friday’s recovery brought many of them back in line with comparably low investment-grade rated corporate bonds.
PG&E has about $500 million of floating rate notes maturing in two weeks and does not face another maturing security until October 2020.
That October 2020 $800 million bond, with a 3.5 percent coupon 694308GT8=RRPS, had yielded more than 10 percent at one point in trading on Thursday, the first of PG&E’s securities to have breached that threshold. On Friday, the October 2020 note was up by more than 3 points to 94.5 cents on the dollar, with the yield dropping to 6.68 percent.
PG&E’s shares were last up about $6.59 at $24.32.
Edison International (EIX.N), whose Southern California Edison subsidiary provides power in Southern California, jumped 14 percent. While investors view it as at less risk than PG&E to massive liabilities from wildfires, its stock has been volatile over the past week as a second fire burned in that region.
The causes of both fires are under investigation.
The volatility in shares of PG&E has drawn a rush of trading in options and traders are betting the stock will remain prone to wild gyrations in the near term.
Reporting by John Benny in Bengaluru and Noel Randewich in San Francisco; additional reporting by Dan Burns in New York; Editing by Nick Zieminski
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