Can PG&E Realistically Deliver on California Governor’s Demands?

California Gov. Gavin Newsom’s late Friday decision
to reject Pacific
Gas & Electric’s bankruptcy reorganization plan has left the
state’s largest utility scrambling to craft a new one that can
win his approval.

PG&E has until Tuesday to respond to Newsom’s critiques with
an amended plan, under the utility’s own commitment to get the
governor’s approval prior to submitting the plan to bankruptcy
court.

While PG&E’s final fate remains in the hands of a
bankruptcy judge, Newsom’s political support could be crucial for
it to emerge from bankruptcy by a June 2020 deadline.

In the meantime, PG&E shareholders, creditors and
counterparties spent the weekend parsing Newsom’s rejection
letter, trying to discern which demands can reasonably be met —
and which may be dealbreakers. 

The biggest roadblock

The biggest challenge for PG&E’s existing management and
investors backing the plan, as opposed to a
rival plan from bondholders
 seeking to take control of the
company, will be Newsom’s demand that it reduce its reliance on
debt financing, analysts agree. 

In order to meet its $13.5
billion settlement
 with wildfire victims earlier this
month, keep
its clean energy commitments
, and satisfy other creditors,
PG&E has relied on a “combination of holdco debt, secured
debt, securitization, and monetization of the net operating losses
in order to make plan distributions,” Newsom wrote. But this
approach could leave PG&E with “limited tools to finance
itself” in the event of an unforeseen crisis, leaving its
much-needed multi-billion dollar grid and safety investments in
jeopardy. 

It could also force PG&E to rely on the $21
billion wildfire fund
 created by state law AB 1054 this summer
to cover its staggering liabilities. This fund is meant to protect
fellow investor-owned utilities Southern California Edison and San
Diego Gas & Electric from the threat of credit downgrades in
the face of otherwise massive potential future liabilities for
catastrophic fires under the state’s inverse condemnation legal
doctrine — not to bail out PG&E. 

As Jared Ellias, law professor at UC Hastings, wrote
on Twitter
, PG&E’s plan is “only remotely feasible”
because of the plan’s insurance backstop. Many of the plan’s key
aspects, such as PG&E’s promise to keep honoring its renewable
energy contracts and other state environmental goals, have been
forced upon it.

“If you follow the design of AB1054 it would seem to point
towards this bankruptcy outcome,” Ellias wrote.

A rival reorganization plan from PG&E bondholders is less
reliant upon debt, and, “it can be argued, provides more headroom
for making investments in safety that Newsom has highlighted as
critical when the company reemerges from Chapter 11,” Rob Rains,
analysts with Washington Analysis, wrote in a Monday note. 

That distinction could give the bondholder group,
which includes Elliott Management Corp. and Pacific Investment
Management Co., a step up in its goal to take majority control of
PG&E. 

Potential time bomb

Another key stumbling block for PG&E comes in the form of
Newsom’s demand for an “escalating enforcement process” to
hold it to account for future safety failures or broken promises.
As described in Friday’s letter, this would include “a
streamlined process for transferring the company’s license and
operating assets to the state or a third party when circumstances
warrant.”

Support for a public
takeover of PG&E
 has been rising in the face of the
utility’s safety failures, with this autumn’s massive and poorly
executed fire-prevention power outaged driving dozens of
municipalities to call for PG&E’s assets to be transferred to
public ownership. This public pressure has “likely inspired this
provision” in Newsom’s letter, Rains noted.

But it would also be an unprecedented process that could take
years of legal wrangling over fair market value, eminent domain and
other key issues. “Therefore, this would not be a quick fix,” Rains
said.

In the meantime, this demand is a potential timebomb for
would-be investors in a post-bankruptcy PG&E. As Ellias
tweeted, “Is Wall Street interested in investing in a utility
with a ‘self-destruct button’ instead of the flexibility that
Chapter 11 provides?” 

It’s also not clear how such an agreement could override
standing bankruptcy law, he wrote. “Wouldn’t PG&E just file
for bankruptcy anyway and try to renegotiate?”

The low-hanging fruit

Some of Newsom’s demands will be much easier to meet. For
example, replacing the current board of directors, chosen for their
bankruptcy reorganization expertise, with a slate of mostly
California residents and “members with extensive safety
experience,” is likely something PG&E was preparing to do
anyway.

Similarly, Newsom’s demand for “strict, clearly defined
operational and safety metrics” is already a clear focus of the
California Public Utilities Commission, which is reviewing
PG&E’s fire safety plan and
investigating its flawed
fire-prevention power outages this
autumn.

Source: FS – GreenTech Media
Can PG&E Realistically Deliver on California Governor’s Demands?