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Pacific Gas and Electric is tapping capital markets this month for $20 billion of financing it needs to exit bankruptcy. But before investors start to chase a rally in the stock triggered by the news, they should remember that a significant part of that sum will come from selling new stock.

The California utility and its holding company PG&E (ticker: PCG) are preparing roughly $9 billion of equity sales and $11 billion of debt sales, according to company statements and filings. The funding will help cover the insured and uninsured costs of catastrophic wildfires caused by PG&E equipment; those costs pushed the companies into bankruptcy in January 2019. In total, PG&E and its operating subsidiary plan to sell roughly $17 billion of new debt to investors, according to the company.

The $17 billion figure isnt new, so it isnt clear exactly why shares soared after Fridays reports that PG&E was planning to market $11 billion of that total. The company said in a presentation last month that the remaining $6 billion will come from temporary bridge financing that it expects to refinance with tax-exempt debt.

Even more puzzling was the continued gains in the companys stock on Monday, after news that PG&E is going to sell $9 billion of new shares to investors. Shares were 1% higher at $12.65 in midday trading, bringing the gain over two days to 7%.

The stock offering will be split between a $3.25 billion private stock offering, and a $5.75 billion public sale. In its public stock sale, the company will reserve $1.25 billion for large institutional investors that own more than one million shares already. About $1.4 billion will be reserved for individual investors buying through retail brokerages. Some of the equitythe company didnt disclose how muchwill be sold as equity units, or prepaid agreements to buy the stock in the future paired with Treasury securities.

The price that underwriters set for the public stock sale will help determine the price for the private share offering.

In the private offering, the company will sell shares to five institutional investorsAppaloosa Management, Third Point, Zimmer Partners, Fidelity, and GIC Private Ltdat a discount to the public offering price. The private investors wont be able to sell their shares for 90 days after the offering, with a few exceptions. If underwriters settled on a per-share price of $12.65 for the public stock offering, the private investors would be able to buy at $10.50 per share, according to terms laid out in a Monday filing from the company.

The $11 billion of debt offerings will be split between $4 billion of high-yield bonds, a $750 million floating-rate loan, and $6.25 billion of investment-grade debt, according to reports from Bloomberg and Reuters. Corporate debt markets have posted double-digit rallies since mid-March, as the Federal Reserve cut rates to zero and pledged to buy corporate debt to ease financial pressure created by the coronavirus pandemic.

A company spokeswoman said that roughly $11 billion of funding was already committed.

We continue to work diligently to obtain approval for our plan of reorganization by the bankruptcy court as soon as possible, so victims will be paid fairly and quickly, she said.

If PG&Es plan is confirmed by the court before the end of this month, the company will gain two important benefits of a state wildfire law passed last year. First, it will gain access to a state fund created to help cover the costs of future catastrophic wildfires. Second, it will be able to benefit from new rules that make it easier for electrical utilities to pass along wildfire costs to customers. State regulators approved the plan on May 28.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

Link:

PG&E Is Getting Ready to Exit Bankruptcy - Barron's