Elliott’s Arrival Shows Just How Friendless PG&E Is

(Bloomberg Opinion) -- In case you hadn’t realized PG&E Corp.’s financial distress will end up costing Californians a bundle, Elliott Management Corp. just showed up.

The activist fund manager has pulled together a consortium offering $4 billion of funding aimed ostensibly at keeping PG&E out of bankruptcy, as reported by Bloomberg News Monday. While likely structured as a secured loan with an option to convert into equity down the line, terms are undisclosed for now.

Given this is Elliott we’re talking about, and PG&E is just one day away from its expected filing day, it’s a fair bet that $4 billion would come at a premium, either in terms of the coupon or the equity option. Plus, as an existing unsecured creditor, Elliott would effectively gain an insurance premium on PG&E succumbing anyway, by becoming a substantial secured creditor.

PG&E and the various stakeholders around it are now in the financial equivalent of the Twilight Zone. The coincidence of there being a brand-new California governor, with PG&E facing huge historical liabilities and potentially huge future ones due to chronic wildfire risk, left the company all but uninvestable as 2019 kicked off. A peculiar state requirement that PG&E give a couple of weeks notice of potentially filing for Chapter 11 provided an added twist, putting the company in a weird state of pre-bankruptcy.

The shock plot twist was last week’s last-minute determination by CalFire, the state’s Department of Forestry and Fire Protection, that 2017’s Tubbs Fire was likely caused by privately owned equipment rather than PG&E’s. The battered stock soared and then dipped again as the company gave no indication that this had altered its trajectory, and wildfire victims’ attorneys noted the development but said they were still targeting PG&E anyway

Unless confidence is restored in PG&E as a funding vehicle – which is why investor-owned utilities exist, after all – the company will be tempted to seek bankruptcy protection soon, even if liquidity isn’t an immediate problem. Given the systemic challenges around California’s wildfires, that restoration would require more explicit support from the state. Yet, the prevailing mood I have encountered among interested parties in California over the past week is a kind of fatalism about PG&E slipping into bankruptcy.

Elliott’s proposal - along with other rival ones from other funds – is an alternative form of confidence injection. The Tubbs Fire report provides enough assurance on the part of the lenders that the company can get its arms around existing liabilities and avoid Chapter 11.

But this move also ultimately requires political support. The money on offer would effectively buy PG&E time to garner backing in Sacramento for efforts to cap its obligations and, importantly, get out from under the threat of future wildfire liabilities. As I wrote here, whatever PG&E’s fate, Californians’ power bills will be going up to meet the suddenly acute cost of climate change. And part of that will relate to the cost of capital needed to pay out victims and invest in the grid. Elliott’s showing up is the most tangible sign of that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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