(Bloomberg) -- PG&E Corp.’s short-term decision to cut California Governor Gavin Newsom out of its settlement with wildfire victims isn’t going to fix a major, long-term problem: It needs to make a deal with the governor’s office.
Despite stripping away a provision late Monday that required Newsom’s sign-off for a $13.5 billion agreement with fire victims, the company is still holding negotiations with his office. The governor has demanded, among other things, that the power provider replace its entire board and come up with a better financing plan for exiting the biggest utility bankruptcy in U.S. history.
Killing the clause was designed to buy the two sides more time to resolve their differences without holding up the rest of the bankruptcy process, people familiar with the situation said. PG&E and the governor have made progress on addressing some of Newsom’s concerns, but they need to negotiate more, they said, asking not to be identified because the information isn’t public. Meanwhile, the condition requiring Newsom’s sign-off had threatened to kill the deal with victims entirely since the settlement is scheduled to be taken up in bankruptcy court Tuesday.
The extended talks underscore how long and drawn out PG&E’s bankruptcy process has become. The company has been struggling to draft a viable restructuring plan since it declared bankruptcy in January amid $30 billion in liabilities tied to catastrophic wildfires its power lines were blamed for igniting. Exacerbating its efforts is the fact that the company’s shareholders and bondholders are locked in battle over control of the company.
The negotiations between PG&E and the governor’s office could keep a rival restructuring plan at bay. Pacific Investment Management Co. and Elliott Management Corp. are leading a group of creditors who’ve offered to inject $20 billion into the company in exchange for almost all of its equity.
The bondholders had been lobbying Newsom’s office to reject PG&E’s plan and considers theirs as an alternative.
‘Very Tough’
Newsom’s office, which rejected PG&E’s plan last week, referred to a filing that the governor made in bankruptcy court Monday detailing his concerns with PG&E’s proposal.
“The governor’s demands are likely very tough” for PG&E and its shareholders to comply with, Praful Mehta, a utilities analyst for Citigroup Inc., said in a research note Tuesday.
And yet his buy-in is crucial for the company’s reorganization. Any plan would require the approval of the governor-appointed California Public Utilities Commission. A spokesman for Newsom’s office also said Tuesday that PG&E must prove to the state that it has fully resolved its bankruptcy and all previous liabilities if the company wants to participate in a statewide wildfire insurance fund to avoid future catastrophic losses.
What Bloomberg Intelligence Says
“Doing away with Governor Gavin Newsom’s approval of PG&E’s $13.5 billion settlement with the fire victims may buy the utility some time to placate the Golden State’s concerns, yet will likely heighten tensions. The governor’s approval may not necessarily be a direct requirement of the initial stages of plan development, but likely becomes much more relevant when assessing the Chapter 11 plan’s feasibility at confirmation.”
--Negisa Balluku, litigation analyst
Click here for the full report.
PG&E shares rose 5% on Tuesday to $10.17 at 1:57 p.m. in New York as Wall Street saw PG&E’s move as a sign that the company’s deal with wildfire victims remains intact for the time being.
“The wildfire victims are the ones who really matter here,” said Kit Konolige, an analyst at Bloomberg Intelligence. “As long as the wildfire victims are on your side -- that’s good for an exit package.”
The company’s bonds, however, fell. Its 6.05% senior unsecured notes maturing in 2034 lost dropped 0.25 cents on the dollar to 106.8 cents at 12:44 p.m. in New York, according to Trace data.
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