PCG PG&E Corporation

By Peg Brickley 

The judge presiding over PG&E Corp.'s bankruptcy handed shareholders a loss, opening the door to a competition over the best path out of bankruptcy that pits the troubled utility against bondholders led by Elliott Management Corp.

Judge Dennis Montali of the U.S. Bankruptcy Court in San Francisco cleared the way for a rival chapter 11 plan from Elliott and other bondholders that are allied with victims of wildfires that drove PG&E to bankruptcy. His ruling stripped PG&E of the sole right to propose a chapter 11 plan covering billions of dollars of damages from blazes linked to PG&E equipment. Shares of the company were down 27% after hours.

The decision means at least two chapter 11 plans will move forward as PG&E shifts into a crucial phase of its chapter 11 proceeding. The coming months will see either a deal with fire victims or a series of judicial rulings that will produce an estimate of how much PG&E will have to set aside to cover those damages. PG&E didn't immediately comment on the decision.

The rival plans are about $5 billion to $6 billion apart on where they think that number will fall. Wall Street banks and hedge funds from California to Connecticut are placing their bets, cutting deals to finance PG&E's chapter 11 plan, the bondholders' rival plan or both.

The bondholders proposed a plan to raise new money and use all but a sliver of PG&E equity to pay off debts, while the company favors raising both debt and equity financing to dig itself out of chapter 11 and prevent shareholders from taking a bigger hit.

The San Francisco utility has faced criticism from regulators and consumer advocates for years for skimping on safety while paying out shareholder dividends. The dividends stopped before bankruptcy, and PG&E's chapter 11 plan would dilute existing shareholders if it makes it through bankruptcy court and past the California Public Utilities Commission.

PG&E's plan is more protective of shareholders than the bondholder plan, which was put together in an alliance with fire victims who said the utility wasn't treating them fairly. At a court hearing Monday, backers of PG&E's strategy said the bondholder plan was the equivalent of a hostile takeover of the company.

Bondholders, backed by most of PG&E's creditors, said it makes sense to have multiple options on the table as the company races to hit a June 2020 deadline to exit bankruptcy. Missing the deadline would cost PG&E the chance to participate in a statewide fund established to cushion California utilities against rising wildfire risks.

What actually happens to the value of PG&E's shares will be determined by the outcome of a judicial process designed to assign a dollar figure to liabilities from blazes that claimed more than 100 lives and wiped out thousands of homes and businesses.

Judges in state, federal and bankruptcy courts are handling different elements of the process, but the end game is to name the number that PG&E has to put into a trust to cover damages owed to people who lost homes, livelihoods and loved ones to the fires.

PG&E pegs its debts to people, state firefighters and federal emergency management agencies at about $8.4 billion. If the court-supervised damages estimate comes in at about that number, PG&E's chapter 11 plan will work out.

At that level, big shareholders and Wall Street investors are standing by to invest fresh cash in the company, some of it in equity, some of it in debt, the company's lawyers said at Monday's hearing in the U.S. Bankruptcy Court in San Francisco. If the figure goes somewhat higher, PG&E may have to reconfigure its financing, but the chapter 11 plan will still work, according to backers of the company's plan.

The higher the fire damages estimate moves, the less value is left for shareholders, who are at the bottom of the payment priority scheme established in bankruptcy.

If the estimate of fire damages hits a certain point, PG&E could be deemed insolvent, meaning shareholders could be wiped out. Dennis Dunne, lawyer for an official committee representing nonfire creditors, said he feared that a high damages estimate will cause big shareholders to "tap out" and refuse to fund PG&E's bankruptcy plan.

Cecily Dumas, lawyer for the fire-damage committee, said at Monday's hearing that if the estimation process produces a figure that is above the $13.5 billion mark, PG&E could be tipped into insolvency, and that is something the fire victims want to avoid. So even if the damages estimate comes in higher than $13.5 billion, the committee will still honor its agreement to jointly sponsor the bondholder plan, she said.

PG&E has accused fire victims of trying to get more than they are owed. Ms. Dumas said the victims won't ask for overpayment.

Both proposed chapter 11 plans provide $11 billion for insurers that paid fire claims and investors that bought those claims, chiefly the Baupost Group LLC, a Boston hedge fund. Both also stand to honor a $1 billion settlement with the city of Paradise, Calif., and other government bodies that sustained fire damage.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

October 09, 2019 18:23 ET (22:23 GMT)

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