PG&E Enters Bankruptcy Setting Stage for Major Restructuring

(Bloomberg) -- A series of wildfires that left more than 100 people dead and destroyed an entire Northern California town has now created the biggest utility bankruptcy in U.S. history: PG&E Corp. filed for Chapter 11 protection early Tuesday morning.

Not even last-minute rescue packages proposed by some of the biggest names in the investment world -- including Elliott Management Corp. and Apollo Global Management LLC -- and California’s assurances that it would work to address fire-liability policies could stop the state’s largest utility owner from declaring bankruptcy. PG&E listed $51.7 billion in total debts, according to filings made in bankruptcy court. It estimated $30 billion in potential wildfire liabilities.

With assets of $71.4 billion, the move is a defensive maneuver that sets the stage for a major restructuring. Since the November Camp Fire, the deadliest in state history, about three-quarters of PG&E’s market value has disappeared, its chief executive officer has left and its bonds have plunged. Regulators have started talking about overhauling its corporate structure, potentially including a public takeover, and the company is said to be considering selling off some of its operations.

“This is going to be a precedent-setting two years in the utilities sector,’’ said Travis Miller, director of utilities research at Morningstar Inc. “There are going to be a lot of stakeholders at the table and the winners and losers will set a standard for any kind of future distressed scenarios in the sector.’’

The Chapter 11 filing allows the company to keep operating while it works out a plan to turn the business around and pay off creditors.

The shares rose as much as 19 percent, suggesting that investors see value in the company. PG&E supplies natural gas and electricity to about 16 million people in Northern and Central California.

Still, given its history of safety issues, “first bankruptcy and then a sale present an opportunity for the state to remake the public face of the company for customers, said Katie Bays, a Washington-based analyst at Height Securities LLC, said in an interview.

The company needs new ownership “to come in there and achieve fundamental structural reforms across leadership all the way down to the linemen,’’ Bays said.

PG&E will appear in a California bankruptcy court at 1:30 p.m. in San Francisco to discuss scheduling hearings in the first days or weeks of the case, according to a filing.

State investigators have tied PG&E’s equipment to more than a dozen fires that swept across Northern California’s wine country in 2017, though last week the company was cleared of blame for the the most destructive one, the Tubbs blaze. They’re also looking at the company’s power lines as a possible ignition source for the Camp Fire in 2018, which killed 86.

The company was also responsible for the 2010 San Bruno pipeline explosion, which killed eight people and led to a $1.6 billion fine as well as six criminal convictions against the company.

“We did not make this decision lightly,’’ PG&E’s interim Chief Executive Officer, John R. Simon, said in a letter to customers. “The power and gas will stay on.’’

California’s wildfires have in the past saddled utilities with millions of dollars in damages, but never have the blazes exacted such a massive financial toll from a company -- creating one of the country’s largest utility bankruptcies of all time.

PG&E said it had about $840 million in insurance coverage for liabilities, including wildfires, for the year starting Aug. 1, 2017. It renewed that wildfire-related liability insurance coverage for the year starting Aug. 1, 2018, in the aggregate amount of $1.4 billion.

“Given its track record of obfuscation and mismanagement, I’m not surprised PG&E claims it can no longer meet its financial obligations,” state Senator Bill Dodd said in a statement. “It’s extremely disappointing and underscores the need for change at PG&E in both its leadership and corporate culture.” Dodd co-wrote legislation passed last year that allows PG&E to sell bonds backed by customer bills to pay for billions of dollars in damages from 2017 wildfires.

The only time the company has ever faced such dire financial straits was during the 2001 energy crisis, when it was forced to place its utility unit in bankruptcy protection. In a twist, the same judge who oversaw the company’s last Chapter 11 filing, Dennis Montali, has been assigned to the latest.

The utility giant’s financial crisis had some of the biggest names in the investment world working up last-minute financing packages that they said would have rescued the company from insolvency. BlueMountain Capital Management, a PG&E shareholder, called the filing “reckless and irresponsible” and called for the replacement of the utility’s entire board.

Such temporary financing “would not have addressed the fundamental issues facing PG&E,’’ the company said in court documents. Meanwhile, PG&E said it saw no prospect of legislation to help it manage liabilities from the fires coming in time to stave off the bankruptcy filing.

The utility’s top creditors include Bank of New York Mellon Corp., Citibank, Mizuho and Bank of America Corp. Bank of New York Mellon holds the largest unsecured claim, totaling $3 billion, court filings show. The first meeting of creditors has been set for Feb. 26.

PG&E’s demise serves to underscore the increasing vulnerability utilities face from natural disasters such as wildfires and hurricanes that are becoming more extreme. That’s especially the case in California, where state law holds utilities liable for damages even if they aren’t found to be negligent.

Officials had said it would be in the state’s best interest to keep the utility healthy and financially viable. PG&E is considered a linchpin in helping achieve California’s ambitious climate goal of getting all its electricity from carbon-free sources by 2045. At the same time, Governor Gavin Newsom chose not to take measures drastic enough to avoid a bankruptcy filing, and regulators actually began a process to evaluate whether to break up or take over the utility.

Newsom said he remains focused on ensuring “that Californians have access to safe, reliable and affordable service” and that fire victims and employees would be treated treated fairly,” according to a statement.

As part of the bankruptcy, PG&E is seeking approval from the court to enter into an agreement for $5.5 billion in debtor-in-possession financing. That would free up the capital it needs to keep operations going through the Chapter 11 process. It listed JP Morgan Chase & Co., Bank of America, Barclays Plc, Citigroup Inc., BNP Paribas SA, Credit Suisse Group AG, Goldman Sachs, MUFG Union Bank and Wells Fargo & Co. acting as joint lead arrangers.

Setting the stage for a potential battle over power contracts, PG&E has asked the judge to rule that the court has the exclusive right to reject existing power purchase agreements. NextEra Energy Inc. is fighting to keep its contracts with PG&E from being canceled as part of the bankruptcy and took up the issue with the Federal Energy Regulatory Commission last week. The commission asserted in response that it shares “concurrent jurisdiction” with bankruptcy courts.

Here are other highlights from the bankruptcy filing:

• PG&E says it intends to pay suppliers in full under “normal terms.”
• Weil, Gotshal & Manges LLP and Cravath, Swaine & Moore LLP are PG&E’s legal counsel.
• Lazard is its investment banker and AlixPartners LLP is the restructuring adviser.
• James A. Mesterharm, a managing director at AlixPartners, will serve as PG&E’s chief restructuring officer. John Boken, also a managing director at AlixPartners, will be deputy chief restructuring officer.

The case is PG&E Corp., 19-30088, U.S. Bankruptcy Court Northern District of California (San Francisco).

--With assistance from Virginia Van Natta, Christopher Martin and Brian Eckhouse.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net;Allison McNeely in New York at amcneely@bloomberg.net;Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editors responsible for this story: Joe Ryan at jryan173@bloomberg.net, Will Wade, Margot Habiby

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