PG&E, state head into uncharted waters after utility announces bankruptcy

The bankruptcy declaration by Pacific Gas & Electric Corp. on Monday is a much greater threat to the company than the Chapter 11 process it went through more than a decade ago in the wake of the state energy crisis, legal observers said.

The near-term prospects of a political solution in Sacramento also appear remote.

Gov. Gavin Newsom, in a Monday afternoon press conference, said the expected bankruptcy filing is very different from the 2001 filing by the company because the utility now could be facing insolvency. “In terms of avoiding bankruptcy, we hope it is avoidable but we are not naive,” he said.

He also announced the creation of a task force on the problem, to be led by his chief of staff, attorney Ann O’Leary.

In a statement, Senate President Pro Tem Toni Atkins, D-San Diego, stressed the need to protect ratepayers, fire victims and the electrical system. She did not mention shareholders.

Critics of the utilities gained ammunition last week when The New York Times reported that 12 California legislators were on a junket in Hawaii in November speaking with utility companies while the Camp and Woolsey Fires burned. PG&E was one of the sponsors of that event, though its representatives opted not to show up.

“There is a little bit of what I call PG&E exhaustion, their constant whine they need to be saved,” said Frank M. Pitre, a partner at Cotchett, Pitre & McCarthy LLP in Burlingame who has filed multiple wildfire related cases against the company. “I think they’ve lost whatever political capital they had.”

PG&E’s Sunday filing with the U.S. Securities and Exchange Commission started a countdown that would allow it to file for bankruptcy by Jan. 29. While noting that “the cause of the Camp Fire remains under investigation,” it could face liability in excess of $30 billion from that and other blazes in 2017 and 2018 that plaintiffs say were started by its electrical equipment.

Meanwhile, PG&E CEO Geisha Williams has stepped down and was replaced by General Counsel John Simon on an interim basis. Deputy General Counsel Janet C. Loduca was promoted to interim general counsel.

PG&E also announced it was retaining two heavy-hitter New York law firms. Weil, Gotshal & Manges LLP is a traditional business firm with a large bankruptcy practice. It has been in the news recently for representing Sears Holdings Corp. in its own high-profile Chapter 11 filing. The firm didn’t respond to a request to name the attorneys that will represent PG&E.

The other firm is Cravath, Swaine & Moore LLP. It handles a wide variety of corporate matters. It announced a team featuring a dozen firm partners in three divisions.

Among these are partners Paul H. Zumbro, Stephen M. Kessing and Nicholas A. Dorsey. They are leading an effort to secure $5.5 billion in debtor-in-possession financing. This is money that can come from current creditors or other financial institutions, designed to help a company through a restructuring.

Debtor-in-possession creditors generally charge a premium for the risk they take and are at the front of the line in being paid off through bankruptcy cases.

In a press release, Cravath said it “expects” to be able to secure the funds to “provide PG&E with sufficient liquidity to fund its ongoing operations.”

“What I think they are trying to do is get some breathing space and get a handle on the litigation that is out there,” said David S. Kupetz, a bankruptcy partner with SulmeyerKupetz APC in Los Angeles, who is not a party to the litigation.Shareholders may be “wiped out or diluted,” he added.

The firms tapped by PG&E are among a fairly small group able to handle a client of the size of PG&E, said Chris H. Hart, a principal with the Oakland-based bankruptcy firm Nuti Hart LLP.

Hart said PG&E’s latest bankruptcy is a very different animal than the one it came out of in 2004. That involved an industry-wide crash in the energy sector, prompted in part by the Enron Corp. fraud scandal and bankruptcy. Most of the money at play was owed to other energy companies.

“The first time around, you could say it wasn’t just PG&E’s fault,” Hart said. “PG&E was caught up in a national problem. I think you’d be hard-pressed to say the same thing now. You’d have to say this is something that is unique to PG&E.”

In its prior bankruptcy, PG&E was represented by Howard Rice Nemerovski Canady Falk & Rabkin, which since has merged. Their lead attorney, William Lafferty, is now a U.S. bankruptcy judge in the Northern District.

There are also indications that PG&E’s courtroom opponents are also seeking bankruptcy counsel. Multiple attorneys contacted to this story said they could not comment.