PCG PG&E Corporation

By Peg Brickley and Katherine Blunt 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 24, 2019).

A bondholder group's bid to take control of PG&E Corp. by paying off massive wildfire damage claims threatens to derail the company's plan for the mega-billion-dollar bankruptcy case as the battle over California utility intensifies.

PG&E has a chapter 11 exit plan and backing from major shareholders. Meanwhile, bondholders led by Paul Singer's Elliott Management Corp. have an exit plan of their own, which is backed by victims of the fires that put the company into bankruptcy.

The bondholder plan would damage the company's shareholders. But the alliance with fire victims in a case that was filed to tackle $30 billion or more in wildfire damages is a political and strategic coup for the bondholders. Bondholders, a group comprising hedge funds, buyout firms and institutional investors, have been in talks for months attempting to rally wide-ranging public support.

It isn't game over yet for PG&E's existing leaders, which have, at least for a few weeks, the sole right to shape the chapter 11 plan that goes out to creditors for vote.

In early October, Judge Dennis Montali will decide whether to leave PG&E in charge of the proceeding, or open up the field to competition.

Tom Dalzell, business manager of International Brotherhood of Electrical Workers Local 1245, said the union supports terminating exclusivity and generally favors the bondholders' plan for the protections it offers union members and the structure of the company. The union had negotiated with the bondholders to ensure retirement benefits are paid in full under the reorganization plan and prevent the company from selling parts of its business to cities launching public takeover bids.

"They've made a much greater effort to communicate with us than the equity group," Mr. Dalzell said. "They've explained their position, answered our questions and generally given us the things that we've asked for."

As shifting alliances shake up the power dynamic of the chapter 11 proceeding that PG&E launched in January, California's largest utility is struggling to keep its footing.

In a divide-and-conquer move, PG&E on Sept. 13 settled with Baupost Group LLC and insurance companies seeking repayment for what they spent on the blazes. The group that had been standing shoulder-to-shoulder with fire victims, demanding full payment from PG&E, is now pledged to support the company's plan.

Fire victims turned to Elliott, a hedge fund with a reputation for sharp tactics in bankruptcy court, and a week after the insurance settlement was announced, the bondholders and fire victims announced they had joined forces to challenge PG&E for control of the bankruptcy.

The combination of the fire victims and the bondholders was a marriage of convenience, several representatives for the victims told The Wall Street Journal. But the victims were willing to look past their reservations if it results in PG&E improving its offer of about $8.4 billion to people who lost homes and loved ones in the fires, they said.

TURN, a nonprofit that advocates for PG&E ratepayers, on Friday added its voice to the call for competition over a chapter 11 plan for the utility.

Monday, both sides flexed their financial muscle, with PG&E and the bondholders each claiming to have lined up the funding needed for their chapter 11 plans. Along with Elliott and Pacific Investment Management Co., the bondholder group has signed up support from financial giants Apollo Capital Management, and Oaktree Capital Management, along with other big investment firms, many of them based in California.

PG&E says it has equity commitments of $14 billion from a broad group that includes existing shareholders, bondholders and some new investors. The company's plan, however, could leave PG&E with at least $5 billion more debt than the bondholder plan, perhaps more, according to people who reviewed the terms.

"Their strategy is twofold. It's to use creative accounting and the bankruptcy laws to get this done," said David Frank of Corso Capital Management in New York, which trades PG&E stock. "Creative accounting is using multiple levels of leverage. The bankruptcy law is that, as long as the numbers add up, we can maintain exclusivity and no one else can come in."

Bondholders want to buy most of PG&E in a deal partially financed with debt, and give the rest to the fire victims in partial payoff for their claims. The bondholders are also providing cash -- $12 billion earmarked for fire victims, including insurance claims holders and individual victims -- under the plan. There is cash for bondholders, as well, fees of more than $600 million for financing PG&E's bankruptcy exit, and hundreds of millions of dollars more interest than PG&E intends to give them if its plan prevails.

Shareholders -- including Boston hedge fund Baupost Group -- that have bet hundreds of millions of dollars that PG&E can exit bankruptcy without sacrificing equity would take a hit under the bondholders' proposal. Shareholders would get the opportunity to invest in about 5% of the revamped PG&E, under the bondholder plan.

In response to the Elliott-led group's plan, PG&E said Monday that its chapter 11 plan "will continue to be updated as developments require, including to reflect any additional settlements or the outcome of the ongoing wildfire claims proceedings."

The wildfire claims proceedings involve three separate court proceedings to determine how much PG&E should have to pay for the blazes. A state court jury trial will test whether victims can hold PG&E to account for one of the most disastrous fires, the Tubbs Fire of 2017, while a federal judge conducts hearings on damages and Judge Montali, in bankruptcy court, handles some of the legal questions.

The bondholder plan halts those proceedings in favor of a settlement. Advocates say the end of hostilities with fire victims ensures that PG&E will get out of bankruptcy in time to meet a June 30, 2020, deadline to participate in a state fund meant to cushion utilities against the financial damage of wildfires.

Patrick Thomas contributed to this article.

Write to Peg Brickley at peg.brickley@wsj.com and Katherine Blunt at Katherine.Blunt@wsj.com

(END) Dow Jones Newswires

September 24, 2019 02:47 ET (06:47 GMT)

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