A federal bankruptcy judge on Oct. 9 ruled that Pacific Gas & Electric (PG&E), California’s largest utility, does not have the sole right to determine the terms of its reorganization. Judge Dennis Montali said those who support a rival proposal, which was devised by a group of the utility’s creditors, can have their plan considered.
The decision could have major consequences for the utility’s customers. PG&E filed for bankruptcy protection in January, with the company saying it faced $30 billion or more in liabilities related to wildfires in California that caused massive property damage and left dozens dead.
Montali ruled that the court can look at a reorganization plan created by a group of PG&E creditors that includes prominent hedge funds. The plan also is backed by individuals who have claims against the utility for wildfire damage.
Montali’s ruling Wednesday came after a court hearing on Monday in San Francisco. It also occurred as an estimated 800,000 PG&E customers were without power, as the utility shut off electricity Wednesday to a large part of its territory due to strong winds that increased the danger of wildfire after months of drought.
Robert Gayda, a partner in Seward & Kissel’s Bankruptcy and Corporate Reorganization Group, in an email to POWER said: “Judge Montali issued a significant, but measured, decision in the PG&E cases [Tuesday]. The decision terminated the Debtors’ exclusive right to prosecute a plan of reorganization, allowing a competing plan, advocated by a group of noteholders and a group of tort claimants, to proceed. Judge Montali did stop short of terminating the Debtors’ exclusivity globally, however, limiting the competing plans that will proceed to two.
“The most significant distinction between the two plans appears to be the amount that might be afforded to wildfire claimants, with the noteholder plan potentially providing those claimants an additional $6 billion. With this decision, Judge Montali signaled that the interests of the wildfire claimants are paramount in these cases, even calling those parties ‘the parties most deserving of consideration.’ This will give those claimants leverage in upcoming negotiations which will determine if the various constituencies can arrive at a consensual path forward.”
The judge’s ruling came after financial markets closed Wednesday, but PG&E’s stock dropped almost 30% in after-hours trading. Montali’s decision is a blow to PG&E’s management and the company’s largest shareholders, a group that also includes hedge funds; that group has argued for the exclusive right to determine the company’s future.
The creditors’ plan would leave current PG&E shareholders with a small stake in the company after it emerges from bankruptcy. The plan was drawn up by company bondholders, including Elliott Management, an activist hedge fund.
Ruling Could Signal Judge Wants Accord
Montali wrote in his decision that “A dual-track plan course going forward may facilitate negotiations for a global resolution and narrow the issues which are in legitimate dispute.” His ruling seemed to indicate that the judge would like the competing groups to agree on a course of action. Montali also seemed to favor wildfire victims with his ruling, writing that “the parties most deserving of consideration” had spoken through the group representing those with wildfire claims.
Frank Pitre, a lawyer for wildfire victims, in a statement said, “We are extremely pleased that the court has opened the process to promote competition over the best plan for this company to emerge from bankruptcy, showing due concern for ensuring fair compensation to fire victims.”
James Noonan, a spokesman for PG&E, in a statement said, “We are disappointed that the bankruptcy court has opened the door to consideration of a plan designed to unjustly enrich Elliott and the other ad hoc bondholders and seize control of PG&E at a substantial discount.” Noonan’s statement reiterated PG&E’s contention that the bondholders’ plan would allow that group to acquire a major stake in the utility at a discount. Noonan also said that the utility is working toward a “fair resolution of all remaining individual wildfire claims.”
Gregory Plotko, a partner at Richards Kibbe & Orbe and a specialist in bankruptcy and special situations investments, in an email to POWER said, “Judge Montali’s goal in creating a competitive, dual-track plan process was to help ensure that wildfire victims achieve the highest possible recovery. The termination of exclusivity will likely cause the debtors’ stakeholders to meaningfully participate in a mediation/settlement process to resolve all major open issues relating to the estimation of wildfire claims, the treatment of bondholders, corporate governance, and the sources of new funding.”
PG&E’s reorganization plan would pay $8.4 billion to wildfire victims. The bondholders’ plan offers claimants up to $14.5 billion.
PG&E needs to emerge from bankruptcy by June 2020 in order for the company to be eligible for money from a state fund, which was set up to help utilities pay for damages related to future wildfires.
Here are links to previous POWER coverage of the PG&E bankruptcy:
—Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine).