PG&E’s Bankruptcy and Your Long-Term Business

We all recently learned that the utility filed. This is because of the enormous liabilities it is going to incur, as a result of the fires that swept through California recently.

From Warren Buffet’s Topaz solar farm (which went into junk bond status) to the older PPA’s that were signed in the last decade, things could get really bad for investors. You see, when a judge decides on what to do with their liabilities (like their PPA contracts), it is likely that they will go back to the owners of these solar facilities and renegotiate the terms.

What does this mean for you?

If you were involved in a deal and just built the project and got paid, you’re ok. You got your cash and you’re good. Hopefully you have little exposure on the O&M side, because these contracts could also get a haircut.

If you were involved in a PPA, you could see your target IRR become demolished. The 7% return could go away. You see the utility could argue (right or wrong) that in order to get back on its feet, it will need to reduce its short and long-term liabilities, so it can pay off its creditors (the biggest ones). They will say they can get PPA’s at half of what they were when you signed with them.

This has made the solar community, very nervous. Very.

It has made folks ask themselves the question: “if utilities can fail, then how do I stay in business?”

While the PG&E story is unique, it is not impossible for it to happen again. If a utility with similar attributes like in San Diego or anywhere in Texas has some similar issues, it could occur and have equally devastating consequences.

Clients have asked me this week, what do I recommend to position themselves?

For the people with no exposure and the ones that will invariably get the letter from the law firm informing them of the pending litigation is the same: diversify.

Offer other services that you can have a direct connection to your clients. Sure, we all know that putting all of your eggs in one basket is not desirable, but we have learned a valuable lesson in the energy business. It is similar to what happened in 2008 and the financial crisis.

This is a crisis. And it’s a crisis of confidence.

This will make all parties: financiers, insurance companies, debt holders, tax equity, appraisers and many more top tier firms re-evaluate their stakes in these kinds of contracts. As you look out to 2019, find alternative ways to serve your clients and prospective clients. One of the most valuable ways you can do this is to offer services “behind the meter”. Storage to other complimentary services. You can partner with other home or business service providers to get your portfolio of clients more diversified.

Our next session of the Solar Executive MBA Training is coming up soon. Click here to learn more and enroll.

That’s all for today.

Keith Cronin