What is PG&E Corp.’s bankruptcy for? Like any spell in chapter 11, it is supposed to be a breathing space, letting the California utility settle its obligations – particularly to victims of wildfires – fairly and quickly. But with PG&E’s fate so deeply intertwined with wider issues for the state, such as heightened wildfire risk and renewable-energy ambitions, the bankruptcy also offers a chance to strengthen California’s power system and share the burdens associated with it more equitably.
Five months in, and with the most acute period of California’s wildfire season beginning, the question is how to get PG&E out of court as quickly as possible. This week, a group including Elliott Management Corp. and Pacific Investment Management Co., styling itself as the “Ad-Hoc Committee” of unsecured creditors, filed a preliminary proposal to reorganize the company. The group has been informally pitching various forms of this for several months. Now it wants Judge Dennis Montali to terminate PG&E’s current period of exclusivity for filing a plan, allowing the group, and perhaps others, to openly solicit support for rival proposals.
This follows two other recent developments. First, my colleagues at Bloomberg News reported last week that PG&E is shopping its own plan. And last Friday, Governor Gavin Newsom issued his proposal for new funds aimed at dealing with liabilities arising from future wildfires.
According to reports, PG&E’s plan relies heavily on rolling over existing California of Department of Water Resources, or DWR, bonds and issuing more bonds securitized by future revenue and $500 million a year derived from cost cuts. The entire $31 billion package doesn’t envisage new equity being issued. It is not terribly surprising that the company, with a new board comprised largely of directors nominated by hedge funds, touts a plan that shields shareholders from upfront dilution.
Yet it looks deeply flawed, especially in light of elements in the rival proposal. The latter calls for $18 billion of new equity provided by the creditors and other unidentified investors. Like the company’s reported proposal, it also would have PG&E use roughly $2 billion of insurance proceeds and also issue new debt to help fund claims arising from previous wildfires and seed an insurance fund for future ones. However, this plan doesn’t rely on issuing more securitized bonds.
By relying on further securitization, the PG&E plan puts the bulk of the burden onto ratepayers. It’s hard to see why the court would favor a scheme encumbering PG&E’s future revenues in order to protect existing shareholders over a plan that simply injects $18 billion of new equity. Jared Ellias, a law professor at the University of California, Hastings, who specializes in corporate restructuring, says the bankruptcy code requires the judge to consider the resulting company’s resiliency when ruling. “Bankruptcy judges aren’t supposed to create future work for bankruptcy judges,” he says. (He also posted an informative thread about all this on Twitter.)
Securitizing $500 million of anticipated cost savings seems especially tone-deaf. As Newsom’s proposal made clear, utilities should be spending more on safety, so diverting cost savings toward claims runs counter to both prudent management and winning political favor – which is more than a nice-to-have for any utility, especially this one.
Newsom’s sketched-out plans for a liquidity or insurance fund, as well as altering the liability standard for California’s utilities, are essential to restoring confidence in their creditworthiness. Yet he must tread carefully. For example, the use of the existing DWR bond as funding may be politically savvy – since it doesn’t technically raise rates – but there’s no denying it represents a burden on ratepayers. A reorganization that piled on further costs while shielding existing shareholders could create a backlash against legislative efforts to strengthen the utilities – which is something the bankruptcy judge might also have to consider.
The Ad-Hoc Committee seems to be thinking along these lines too. Calling for termination of exclusivity is unusual, especially in a case this big, and an uphill battle. So the creditors need as many allies as they can get. Hence, their proposals for a bigger claims pool, putting representatives of a future wildfire claims fund and customers on PG&E’s board and committing PG&E to honor existing renewable-energy supply contracts (a touchy subject). Ellias says “tactically, it’s incredibly useful” in terms of building a coalition of stakeholders within the court and strengthening credibility with the judge.
Because, ultimately, this is a negotiation process. The mere fact that this new proposal exists, with a reasonably detailed term sheet, pressures PG&E to flesh out and perhaps modify its own position. While it’s impossible to gauge the level of equity dilution implied by the lenders’ plan at this point, it would likely to be significant if executed. Even just using the current share price could see existing shareholders reduced to around 40% ownership, all else equal.
Rather than focus on guessing an unknowable number, though, investors who have bid up PG&E’s stock in recent weeks should consider instead the direction of the current. The fact that the judge last month didn’t grant PG&E’s request for an extension on exclusivity in full indicates his openness to rival offers being presented. And despite a plethora of TBDs in the creditors’ proposal, the promise of new equity, and a lot of it, is inherently appealing.
This isn’t some bankrupt store chain or busted real-estate empire. A reorganized PG&E must be strong enough to weather the inevitable storms to come. The surest way to make that happen is to recapitalize the company with new money rather than encumbering it with more obligations. The overriding aim of this bankruptcy must be to ensure victims get paid and California’s lights stay on without burning its towns to the ground. And the obvious claimants to take the strain on getting that done are the ones traditionally found toward the back of the line: equity holders.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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