KBRA Publishes Project Finance Research: How Will Pacific Gas & Electric's Bankruptcy Impact Project Financings?

Pacific Gas & Electric (PG&E) filed for bankruptcy protection on January 29 to protect the utility from liabilities resulting from the historic California wildfires. PG&E said its total liabilities are around $52 billion, which includes anticipated expenses from the wildfires. The filing was expected as the utility announced on January 14 that Chapter 11 protection was the only remaining option that would allow it to maintain financial stability and continue to service its customers. However, the bankruptcy process is expected to be lengthy and there is uncertainty surrounding the fate of PG&E's signed long-term power purchase agreements (PPAs) which, according to a 2017 10K filing, was around $36.7 billion with various renewable energy projects.

KBRA believes that PG&E, as a debtor in bankruptcy, is likely to request the "rejection" of many of its PPAs. The standard for bankruptcy court approval of a contract rejection is whether the utility can demonstrate that the rejection is a product of sound business judgment. This is likely for those PPAs where the purchase price is higher than the current market rate. In the event of a rejection, the seller's recourse is limited to (1) asserting a claim for damages from the contractual breach, or (2) offering to renegotiate the terms of the PPA. Therefore, it is quite plausible that a significant portion of PG&E's existing PPAs could be terminated entirely or renegotiated to a lower amount since most of these contracts are above market. There are, however, some factors that suggest this may not occur.

KBRA's Project Finance group has published an article discussing some of these factors and the impact PPA rejections will have on outstanding project financings. To view the report, please click here.

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.