PG&E shrugs off wildfire worries with US$1.75bn bond
Pacific Gas and Electric, which serves northern and central California, hit the bond market on Monday and took advantage of positive sentiment about the utility, even as concerns grow that recent Los Angeles wildfires are straining the sector's main financial safeguard.
PG&E's operating company priced a US$1.75bn two-part secured bond whose proceeds will be used to refinance its US$600m 3.5% and US$450m 4.95% first mortgage bonds, both due in June 2025. The deal joined US$4.55bn of supply from six other utility borrowers today in the US high-grade market.
Active bookrunners Mizuho, MUFG, SMBC and Wells Fargo set the US$1bn 10-year at a spread of 130bp, coming in from IPTs of 155bp–160bp. Meanwhile, the US$750m 30-year was set at 150bp over, around 25bp tighter than where marketing started.
Rated Baa2/BBB/BBB, the bond offering is in the market amid mounting concerns that recovery costs from the Los Angeles wildfires could drain the US$21bn set aside for the so-called AB 1054 wildfire fund, which allows utilities to recoup funds used to pay out wildfire claims.
Fitch said if regulators judged that utility Southern California Edison was responsible for igniting the Eaton fire, one of several conflagrations that burned through Los Angeles this year, the resulting costs could deplete the insurance fund.
"Protection provided by the Fund to PG&E and the other participating IOUs could be meaningfully reduced, a key credit concern," the US rating agency said in a Monday note.
A bond portfolio manager said that after the California wildfires, investors should stick to buying secured utility debt.
Despite the real challenges faced by the sector as a whole, PG&E's spreads have performed strongly in part because the California utility is making steady progress towards regaining its former investment-grade rating.
Though the utility's first mortgage bonds are investment-grade, S&P and Fitch rate the issuer itself one notch below investment-grade Ba1 and BB+, respectively.
The utility's 6.75% 2053 first mortgage bonds were trading at 152bp over Treasuries on Friday, 11bp tighter than where they traded at the start of February, according to MarketAxess data,
To repair its balance sheet, PG&E raised in December a combined US$2.4bn from sales of common equity and mandatory convertible preferred stock. The company also closed on a US$15bn loan guarantee from the Department of Energy in January.
Nonetheless, CFO Carolyn Burke said earlier this month that while executives have talked to rating agencies about the company's improved credit metrics, upgrades are unlikely in the very near term, and more clarity is needed on how policymakers will deal with the California wildfires.
"They seem to be taking a very measured approach and don't seem inclined to rush to action, which we appreciate given the circumstances," she said during a February 13 earnings call.
"We still remain confident after all those conversations that the rating agencies will recognize our progress in time."