Credit rating agency KBRA released a project finance report exploring how the bankruptcy of Pacific Gas & Electric will affect project financings and power purchase agreements (PPAs).
PG&E filed for bankruptcy protection on January 29 to protect the utility from liabilities resulting from the historic California wildfires. The company 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 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.