PG&E Bankruptcy Battle Continues as Bondholders and Wildfire Victims Propose Plan – Barron’s

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PG&E and its shareholders are facing a serious challenge to their control of the companys high-stakes bankruptcy.

Two factions have formed in the proceedings, and each group has introduced a plan to steer the California utility out of bankruptcy. On one side is PG&E (ticker: PCG) and its shareholders, along with wildfire insurance claimants, a group that includes insurers and hedge funds. On the other is PG&Es bondholders and wildfire victims.

The latter group didnt announce itself until late last week. A consortium of bondholders and wildfire victims is seeking permission to introduce a reorganization plan to compete with PG&Es. The judge overseeing the bankruptcy proceedings will hold a hearing on that request on Oct. 8, court filings show, and a status conference on Jan. 24.

Bondholders and wildfire victims included a restructuring plan in their initial filing, and provided more detail in investor commitment letters filed on Monday. Their proposal provides far worse terms for shareholders than the plan PG&E (and its shareholders) filed on Sept. 9.

To review: PG&Es plan would raise $14 billion with some form of equity issuance, and $7 billion from new debt. The equity could be issued through a rights offering in some circumstances, which would limit the dilution of existing shareholders current stakes. But the utility also reserves the right to sell shares through methods such as at-the-market offerings, which have been used by some companies that arent seen as especially friendly to shareholders.

Whats most important in PG&Es proposal, however, is the $18.9 billion cap on wildfire paymentsat least, any payments financed with new equity or debt. For any costs above that cap, the utility would need to charge its customers more, or issue electricity-rate-backed bonds. Either action would need to be approved by its regulator, the California Public Utilities Commission or CPUC.

That cap matters because the company agreed last week to settle most wildfire insurance claims for $11 billion. The most recent public data show that 44% of PG&Es insurance claims were held by hedge funds, with the rest held by insurers. Altogether, the hedge funds and insurance companies also owned 34.1 million of the utilitys shares, or 6.4% of the companys outstanding stock.

Simple arithmetic shows that wildfire victims would get just $7.9 billion of the new money if the cap remains at $18.9 billion. When asked about the way it would allocate funds between the two groups of wildfire claimants (victims and insurers), PG&E said that the details of its reorganization plan would likely change over time.

We remain committed to working with the individual plaintiffs to fairly and reasonably resolve their claims and will continue to work to do so, the company said in a statement. Our progress toward a final [reorganization plan] is iterative.

Even so, the utilitys proposal seems to have alienated wildfire victims, who have joined with bondholders to write an opposing plan. The bondholders, such as Pimco and Elliott Management, were rebuffed in an earlier attempt to propose a restructuring plan. But that was before they had the wildfire victims as co-authors.

The new coalition has also won support from the Utility Reform Network, a ratepayer advocacy group that raised questions about the feasibility of PG&Es plan in a Sept. 19 filing.

The bondholders new plan creates a trust to hold $24 billion on behalf of wildfire victims and insurance claim holders. Half of that sum would be in cash, and the other would be shares, or a roughly 39.5% stake in the new company (on a fully diluted basis). Wildfire victims would also have the authority to choose the trusts overseers.

Under their plan, bondholders would commit to buy $13.5 billion of new debt and $14.9 billion of new equity, or a roughly 58.8% stake in the new company (fully diluted). Nearly $8 billion of that debt would be secured by a mortgage on all principal property of PG&E, according to the filing. The utility didnt have any secured debt outstanding before it filed for bankruptcy.

Unsurprisingly, the plan leaves bondholders and wildfire victims with the largest stakes in the company. Existing shareholders would get the opportunity to buy a 2.9% stake in the company, or $744 million of new shares.

Bondholders and wildfire victims would also replace the companys nine-member board, allotting one seat to the companys employees, one seat to a ratepayer advocacy group, and one seat to the state wildfire fund.

They would also agree to oppose any attempt to municipalize any part of the business, meaning sell its infrastructure to a local government so the municipality could run its own electrical utility. That is seen partly as a concession to organized labor, because breaking up the company could also break up the companys employee union.

That group has already reported a larger pool of capital willing to backstop the sale of new equity and debt than the shareholders have. They have commitments from 12 investment firms for all $28.4 billion of new-money investment.

On the shareholders side, Knighthead Capital and Abrams Capital have agreed to backstop the plan with $1.5 billion of financing. The company said in a Monday news release that it had received at least $14 billion in aggregate equity commitments from a broad array of investors, including current shareholders, bondholders and parties not currently invested in the Companys equity or debt securities, but hasnt filed additional commitment letters yet.

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

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PG&E Bankruptcy Battle Continues as Bondholders and Wildfire Victims Propose Plan - Barron's