The hedge funds attempting a hostile takeover of PG&E Corp. are trying to get their plan back on track. And they realize their best chance of doing that is to make California Gov. Gavin Newsom happy.
The utility’s bondholders told Newsom late Friday they’ll meet his demands for overhauling the troubled utility — demands that PG&E itself, struggling to exit bankruptcy, haven’t met so far. In a 17-page letter to Newsom, the bondholders promised to create a “resilient, reliable and reimagined PG&E.”
They vowed to consult with Newsom on appointing a new board of directors for the utility and said they’d give the state the right to buy the company if PG&E engages in “willful misconduct” that triggers another big wildfire — two promises that align with Newsom’s demands for greater control over PG&E’s operations. They added that their plan will put PG&E in better financial shape than the company’s own plan, which is backed by a different pack of hedge funds.
The courtship of California’s governor by Wall Street interests illustrates how critical the next few months will be for PG&E — and how crucial a role Newsom will play in deciding the troubled utility’s fate.
Because it’s a regulated utility, PG&E already would have needed the state’s approval for its bankruptcy reorganization plan to take effect. The enactment of AB 1054, which created a $21 billion state-run insurance pool to cushion utilities against future wildfire claims, gives the state even more authority. PG&E must exit bankruptcy by June 30 and meet certain conditions set by the state to become eligible for a share of the fund.
All of that gives Newsom a huge role in determining which faction winds up controlling the company— the bondholders, or a separate group of hedge funds that control much of PG&E’s stock.
Newsom’s commanding position is entirely appropriate, said Michael Wara, an advisor to the Legislature on wildfire issues and director of Stanford’s climate and energy program. “The other folks in the bankruptcy are there to make money,” Wara said. Newsom’s job is to “protect the interests of the state.”
Newsom’s spokesman couldn’t be reached for comment.
The governor has openly campaigned for competitive bids for PG&E and has been speaking with a consortium of mayors, led by San Jose’s Sam Liccardo, which is trying to engineer a customer-owned takeover of PG&E.
“We’ve been in conversation with him and his team and they are expressing a willingness to explore what we’re doing,” Liccardo said. He called the fight between the hedge funds “a sideshow to solving the fundamental need for 16 million Californians to have safe and reliable power.”
Victims take center stage
The fact that dueling hedge funds are fighting for control of a notoriously unpopular company stuck in bankruptcy speaks to PG&E’s potential upside. California’s largest utility generates almost $17 billion in annual revenue.
Already, the presence of the bondholders has forced PG&E to increase its offer to wildfire victims. The bondholders, led by hedge funds Elliott Management and Pimco, made an agreement in September to pay $13.5 billion to victims of the 2017 wine country fires and the 2018 Camp Fire, which have been blamed on PG&E’s equipment.
Earlier this month, though, PG&E struck back by making a similar agreement with lawyers for tens of thousands of fire victims, who then renounced their previous deal with the bondholders. The payments are for damages not covered by insurance.
“PG&E’s offer is 10 times better than it was,” said Mark Toney of The Utility Reform Network, or TURN, the consumer advocacy group. “The only reason is, there was a competitive proposal on the table.”
By offering the same amount as the bondholders, PG&E regained control of its destiny — until Dec. 13. That’s when Newsom rejected PG&E’s bankruptcy reorganization plan, saying it fell “woefully short” of the governor’s insistence on a massive makeover.
Newsom also said the bondholders’ plan, as originally outlined, was inadequate. He then outlined his demands, including a new board of directors and the right to take control of the company if it fails to meet certain safety targets.
Whoever owns PG&E needs state approval for its bankruptcy plan so it can qualify under AB 1054 for the $21 billion wildfire insurance pool — a program that will be crucial to PG&E’s ability to get loans and other investment and get back on its feet financially.
Because the pool is partially funded by ratepayers — through the extension of a $2.50 monthly surcharge on utility bills that was due to expire in 2020 — it gives PG&E and others a buffer against future catastrophes. Even if their equipment causes another big fire, they’ll be able to pull dollars out of the fund to pay claims — and will have to reimburse it only if the state decides they operated their equipment recklessly.
PG&E has said it will find a way to comply with Newsom’s demands.
“We have been engaged in constructive discussions with the governor’s staff,” utility lawyer Stephen Karotkin said at a U.S. Bankruptcy Court hearing last week.
Courting Gov. Newsom
At the hearing, Judge Dennis Montali approved PG&E’s deal with fire victims and a second, $11 billion agreement to partially reimburse insurance companies for claims they’ve settled. But even with Montali’s approval, PG&E must still deal with Newsom.
Now the bondholders, sensing an opening, are trying to regain the initiative. In their letter to Newsom, the bondholders said their plan would fund PG&E’s bankruptcy reorganization with billions in fresh capital — in contrast to the company’s own proposal, which would saddle the utility with billions in new debt.
They also said their payment plan is better in part because victims would get compensated all at once. PG&E’s plan calls for payments in phases. In addition, the bondholders said customer rates wouldn’t rise any faster “than anticipated economic growth in PG&E’s service territory” for at least four years.
PG&E has been resisting the bondholders’ efforts because, among other things, the takeover would largely wipe out the holdings of existing PG&E shareholders.
In response to the bondholders’ letter, PG&E said it remains “engaged in active and constructive dialogue with stakeholders” and is “committed to a safe, sound and financial stable” company.
By Dale Kasler, The Sacramento Bee