PG&E set to emerge from bankruptcy crippled with debt

PG&E Corp. will emerge from bankruptcy saddled with substantial debt and lingering concerns over its safety practices.

The bankruptcy judge overseeing PG&E's reorganization indicated at a Tuesday hearing he would approve its $59 billion exit plan. The proposal involves issuing significant sums of new debt and equity to help pay for $25.5 billion in wildfire settlements -

U.S. Bankruptcy Judge Dennis Montali reasoned PG&E is in a better position than when it filed for Chapter 11 protection a year-and-half ago to address challenges for safely delivering power to 16 million Californians.

But questions persist over how the utility will pay for billions of dollars in necessary safety upgrades that threaten the long-term sustainability of PG&E's future.

PG&E will exit bankruptcy with $38 billion in debt, almost twice the $22 billion it had coming into the proceedings.

USC Gould School of Law Professor Robert Rasmussen said concerns endure over whether the company will "have enough free cash to invest in its operations." He called PG&E "highly leveraged," explaining there's "not much margin for error" in how it spends its money.

"It doesn't take much imagination to say we might see PG&E in bankruptcy a third time," he said, citing its 2001 foray into bankruptcy when the price of electricity shot up.

The hedge funds and other investors that are financing the utility's reorganization and bet on its successful emergence from Chapter 11 early on stand to make substantial sums. One such group are those that bought insurance claims for pennies on the dollar before PG&E agreed to an all-cash $11 billion settlement with insurers.

The Baupost Group, a Boston hedge fund, bought $6 billion in discounted insurance claims before the company filed for bankruptcy, according to court filings. It now stands to make hundreds of millions of dollars on the short term investments.

At the same time, victims of the historically destructive 2017 and 2018 wildfires caused by PG&E equipment, which killed more than 100 people and destroyed nearly 30,000 homes and businesses, still do now know the total value of their settlement. Half of their $13.5 billion agreement with the company to settle their claims will be paid with equity to be distributed through a trust.

The committee representing wildfire victims have pushed to renegotiate the deal in recent months amid market turmoil caused by the COVID-19 pandemic and what is expected to be another historically dry wildfire season.

A plaintiffs' attorney at a hearing before Montali on Tuesday argued the trust could see a $2 billion shortfall if current stock price estimates hold. PG&E has maintained the group agreed to take on the risk that the price of the shares could drop for a higher total settlement amount.

San Diego attorney Gerald Singleton, representing roughly 7,000 people, said he's optimistic the company's shares will increase and that his clients will be paid in full.

If PG&E does successfully exit Chapter 11, Rasmussen noted the full compensation of wildfire victims will depend on whether the company can maintain or increase its value by safely delivering power and not starting more wildfires.

Doing so, Rasmussen said, involves PG&E investing billions of dollars in vegetation management and hardening its infrastructure, among other things, with money it might not have or be able to raise considering its debt.

"I can imagine people saying 'My life was destroyed, ruined and hurt by PG&E -- the last thing I want to do is be a cheerleader for PG&E.'"he said.

The California Public Utilities Commission has been empowered to reign in PG&E. It's required PG&E to overhaul its board of directors, appoint an independent safety monitor and divide operations into regional units to better focus on safety.

U.S. District Judge Singleton, who regularly sues utilities for wildfire liability, said he's encouraged by the "strides" in safety PG&E seems to have made while in bankruptcy.

"Everything I've seen from PG&E in the last year points to it going in the right direction," he said. "If they keep the culture in place, this will be fantastic for the people of California."

Threatening a state takeover of the utility, Gov. Gavin Newsom initially opposed PG&E's plan but ultimately backed it after the company agreed to changes regarding oversight and regulation. He still has the authority to revoke its operating license if it's found to have been negligent in starting a wildfire.

State Sen. Jerry Hill, D-San Mateo, said contingency plans are "absolutely necessary" in case PG&E cannot fulfill its safety commitments. He introduced a bill in March that would turn PG&E into a nonprofit called Golden State Energy if it loses its license.

"They're going in the right direction and again, we all hope they will do it," he said. "But we can't rely on hope alone. We need a backstop, a plan B."