Wildfire mitigation fund may hurt bondholders’ chances to reorganize PG&E

State lawmakers' passage of a multi-billion-dollar wildfire mitigation fund casts further doubt on a plan by some Pacific Gas and Electric Corp. bondholders to reorganize the utility.

The bill, AB 1054, eases concerns about the financial viability of PG&E once it emerges from bankruptcy by warding off threats by various credit agencies to downgrade California utilities and potentially shifting the burden of liability for future wildfires.

U.S. Bankruptcy Judge Dennis Montali of the Northern District will consider the proposal at a hearing Wednesday.

PG&E has garnered the support of most parties in the bankruptcy proceedings, which cite the Legislature's passing of the bill as a "critical component" of restructuring, in opposition to the bondholders' plan.

The utility's backers argue terminating PG&E's right to an exclusive window to come up with its own plan in light of the mitigation fund will create unnecessary chaos.

PG&E's stock closed at $19.40 when the bill was passed July 12 compared to $8.38 when the utility announced its bankruptcy Jan. 14.

"Everything that's being done by PG&E is with the credit rating agencies in mind," said a person familiar with the situation who is not authorized to speak publicly about the matter. "There's a need to restore this company to what it was before bankruptcy -- a company with normal, long-term investors."

The bill creates a fund of up to $21 billion to pay for wildfire damages if the utility is found to be a "prudent" manager in maintaining its equipment. In addition to requirements that major utilities must first spend $5 billion on infrastructure improvements and pass annual safety inspections to access the pool, PG&E will have to emerge from bankruptcy by June 2020.

The bondholders argue their plan is the only route for the utility to exit bankruptcy by the target date.

"With the recent inception of the 2019 wildfire season and the impending deadline, it is now time to move these cases as quickly as possible towards emergence," wrote Ashley V. Crawford, who represents the bondholders.

The Akin Gump Strauss Hauer & Feld LLP attorney added PG&E has "spent a considerable amount of time lobbying for a controversial legislative bail-out for its equity holders that will almost certainly never materialize."

The restructuring strategy was proposed by 25 financial institutions, including Elliott Management Corp., which collectively holds over $10 billion of the utility's debt.

PG&E attorney Stephen Karotkin said the proposal is an attempt to "hijack the Chapter 11 process."

Committees representing PG&E creditors, shareholders and wildfire plaintiffs are unanimously opposed to the idea.

"It would have been reckless to propose a plan, as the [bondholders] did, before that outcome determinative legislation was passed," wrote James O. Johnston, an attorney for PG&E shareholders.

Cecily A. Dumas, who represents wildfire plaintiffs, said she supports terminating the utility's exclusive period to propose a plan, but the bondholders' proposal is severely underfunded and unconfirmable because it only leaves a $18 billion capped trust to settle all claims for damages associated with blazes caused by PG&E.

The bondholders' proposal would inject $30 billion into PG&E in exchange for stock, which would allow the group to acquire PG&E at a significantly discounted rate and accrue new debt with interest rates above market value, according to critics.

Johnston condemned the proposal as a "naked attempt to seize control of PG&E at a fire sale price." It would allow the group to own 85% to 95% of PG&E at a price roughly $10 billion less than what it is actually worth, he continued.

With the passage of AB 1054, PG&E is now refining a plan that will settle existing wildfire claims, address future liability and allow it to emerge from bankruptcy with substantial infusions of cash raised from existing equity holders now that its credit rating is no longer imperiled, according to Karotkin.

State Street Corp., Franklin Resources Inc., BlackRock, Inc. and T. Rowe Price Group, all of which are long-term investors in PG&E and provide low-cost capital, decreased their holdings in PG&E by over 70% since 2017, according to financial filings.

Subrogation claim holders also filed their alternative reorganization proposal Tuesday. Montali will consider the matter Aug. 13.