PG&E, the power company threatened by liabilities in California’s deadly wildfires, negotiated $5.5 billion in bank loans to carry it through a bankruptcy restructuring even as a major investor urged executives to wait.
The utility would have to obtain court approval to withdraw cash under the commitments for so-called debtor-in-possession financing, which it obtained from JPMorgan Chase, Bank of America, Barclays PLC, and Citigroup, according to a regulatory filing in late January. Such financing provides a lifeline to distressed firms, typically taking precedence over other outstanding debts in return.
PG&E expects the loans will “provide sufficient liquidity to fund its ongoing operations, including its ability to provide safe service” during a Chapter 11 proceeding expected to start around Jan. 29 and last for two years, according to the filing.
Under U.S. law, companies can use a Chapter 11 bankruptcy to reorganize under court oversight; firms planning to go out of business typically opt for a Chapter 7 liquidation.
While the San Francisco-based company has argued that bankruptcy is “the only viable option to restore PG&E’s financial stability,” Blue Mountain Capital Management, a hedge fund that owns $30 million of PG&E shares, says the utility hasn’t proved its case.
“You have publicly stated that bankruptcy is in the best interests of all stakeholders,” the hedge fund said in a Jan. 22 letter, its second to PG&E’s board in less than a week, “but you have failed to articulate a single cogent reason for why it is beneficial to any stakeholder.”
Indeed, for stockholders like Blue Mountain, bankruptcies are precisely the opposite. The ultimate owners of corporations, investors bear the brunt of losses in such cases, with preferential treatment afforded to creditors.
But they’re far from the only losers. A bankruptcy would also delay payment of claims by victims of recent wildfires, some of whom have blamed the blazes on aging PG&E equipment sprawled through heavily wooded portions of the state, as well as push up bills for customers, Blue Mountain argued.
“If you continue down this unwise path, you will — individually and collectively — be called upon to answer a number of uncomfortable questions,” the hedge fund said. “Beyond the obvious question of why you would force the company into an unnecessary bankruptcy, you will also need to answer why you rushed the decision.”
PG&E announced its plans to seek Chapter 11 bankruptcy protection in mid-January, noting a recent state law that requires California regulators to be notified at least 15 days in advance, as potential liabilities mounted from a November wildfire that was one of the worst in the state’s history.
PG&E has said it doesn’t yet know whether its equipment was responsible for the Camp Fire, which destroyed the Northern California town of Paradise along with nearly 14,000 homes and killed at least 86 people, a fact seized upon by Blue Mountain.
“The liabilities are contingent and uncertain,” the hedge fund argued in a Jan. 17 letter. “It could take up to a decade for this litigation to be resolved and exact judgments to be known.”
Because of that, the utility’s argument that liabilities from the Camp Fire and others in 2017 and 2018 might top $30 billion are insufficient, especially when compared to PG&E’s market value of more than $35 billion before the wildfires, Blue Mountain claimed.
PG&E had renewed wildfire insurance coverage in mid-2018 for a total of $1.4 billion, but its liability for the Camp Fire alone might be between $8.7 billion and $13 billion, JPMorgan Chase estimated in late 2018. The investment bank Goldman Sachs projected a range of $9.9 billion to $12.5 billion.
Daniel Ford, an analyst with the Swiss lender UBS, said PG&E’s responsibility could reach $24 billion, absent state assistance that might trim that amount by 75 percent.
The company’s risk is heightened by California’s “inverse condemnation” doctrine, which leaves utilities liable for damages from a fire linked to their equipment even if the companies didn’t act negligently. An effort by former Gov. Jerry Brown to change that proved unsuccessful last year.
“It is unclear how much political will exists to revisit inverse condemnation despite the clear potential burden on ratepayers,” JPMorgan analyst Christopher Turnure said in November.
While a California law passed in 2017 creates a mechanism for electrical utilities to pass the costs of wildfire-related damages on to users, it applied to disasters in that year as well as those in 2019 and afterward. No specific provision was made for fires in 2018.
The power company doesn’t expect any interruptions in service during its Chapter 11 proceedings and says it will keep helping victims of wildfires in 2017 and 2018 while working to rebuild damaged portions of its network and restoring service.
Still, a PG&E bankruptcy “does not seem like a good outcome for California or shareholders,” UBS’s Ford noted. Not only would stock value be hurt, California would lose some of its ability to regulate a major utility and address wildfire risk while implementation of its environmental policies would suffer, he noted.
