PG&E Nears Deal With KKR for Stake in Power Business Spinoff
California utility is seeking regulatory approval to sell KKR part of a new company that would house most of its power generation business
PG&E PCG -0.87%decrease; red down pointing triangle is nearing a deal to sell a multibillion-dollar stake in its fleet of power plants to investment giant KKR KKR -2.32%decrease; red down pointing triangle as the company seeks funding for work intended to prevent its power lines from sparking wildfires.
The California utility company said it is seeking regulatory approval to transfer its sprawling hydroelectric system, as well as a smaller fleet of natural gas, solar and battery facilities, into a new subsidiary called Pacific Generation, 49.9% of which it intends to sell to KKR, one of the world’s biggest infrastructure investors.
PG&E has said the assets are nearly $3.5 billion, and analysts estimate the potential sale could be between $2 billion and $3 billion.
PG&E is pursuing the sale as it grapples with limits in its ability to raise debt and equity following a complex bankruptcy restructuring that required it to issue record amounts of each. It has been seeking alternative ways to fund its capital-spending plan, which proposes $62 billion in investments between 2024 and 2028.
“As we continue to build our systems, we must accelerate the infrastructure investments that will enable us to provide our customers with safe, sustainable, reliable and affordable energy,” said Chief Financial Officer Carolyn Burke.
In acquiring a stake in Pacific Generation, KKR would share in returns on capital investments in the generation fleet, as well as revenue from the sale of electricity. The firm would do so through its infrastructure investment business, which has $59 billion in assets under management.
PG&E filed for chapter 11 bankruptcy protection in 2019, citing an estimated $30 billion in liability costs stemming from a series of major wildfires that killed more than 100 people and destroyed thousands of homes and businesses. It emerged in 2020 with more debt than it had at the start of the process and without an investment-grade credit rating.
The company’s proposed investments are largely focused on reducing the risk of its power lines igniting more fires, as well as upgrading and expanding the grid to support the state’s clean-energy goals. It has an ambitious plan to bury 10,000 miles of power lines in areas at high risk of fire, a multibillion-dollar undertaking that has gotten pushback from consumer advocacy groups.
But PG&E’s financing options are limited without further increasing customer rates, which are among the highest in the nation. Already, the company’s customers have seen monthly electric bills increase by an average of 18% this year.
The California Public Utilities Commission, which must approve the sale, has expressed concerns that allowing investors to own a substantial stake in PG&E’s generation portfolio could create a range of risks, including the prospect of operational issues. The agency has proposed blocking the sale but hasn’t yet made a final decision.
A number of organizations, including water agencies, irrigation districts and consumer advocacy groups, have expressed opposition to the sale, citing concerns that it could ultimately compromise the safety and reliability of the assets, which include a network of dams, and potentially change the way water supplies are managed.
PG&E says its existing workforce would continue to operate and maintain the facilities. KKR has invested in a handful of other U.S. energy companies through its infrastructure arm, including Sempra Infrastructure and Colonial Pipeline Co.
Because of KKR’s involvement, PG&E says Pacific Generation would have a higher credit rating than the utility company, resulting in a lower cost of debt. That would reduce customer rates by more than $100 million over the next 20 years, the company says.
“We are honored to be considered for this long-term effort and look forward to working alongside PG&E and Pacific Generation to enhance public safety, generate customer savings, and help California achieve its ambitious climate objectives,” KKR Managing Director Kathleen Lawler said.
PG&E has asked the CPUC to allow it more time to provide additional information explaining the benefits of the transaction. The agency could make a decision as soon as next month.
PG&E has told the commission that if it blocks the sale, the company could have to scale back certain investments in the grid. Executives say the company has been working to find ways to avoid having to alter its work plans.
PG&E told investors this month that without the approval of the sale, it would likely need to issue new debt and equity to fund the $62 billion it plans to invest through 2028. That could delay its efforts to improve the value of its shares and regain an investment-grade credit rating.