PG&E Is Set to Exit Bankruptcy, Ending Saga Sparked by Fires

(Bloomberg) — Only 19 months after the Camp Fire erupted in the tinderbox mountains of Northern California, PG&E Corp., the power utility behind the deadliest conflagration in the state’s history, is poised to emerge from bankruptcy with its safety reforms still in question.

As the state braces for another fire season, the judge overseeing PG&E’s Chapter 11 case said Tuesday he would approve its $59 billion turnaround plan. Moments earlier, its chief executive officer pleaded guilty on behalf of the company to involuntary manslaughter, bringing its criminal case from the deadly blaze close to an end. And on Wall Street, PG&E moved forward with plans to sell bonds to fund its restructuring.

The quick series of events concludes a tumultuous chapter for PG&E. Yet it’s exiting bankruptcy facing many of the same challenges as it did the day it filed. Efforts to strengthen its finances and safety procedures are still underway, and the long-term future of the giant utility remains in question.

“It’s only going to take one season like the last couple and they’d be back in bankruptcy,” said San Jose Mayor Sam Liccardo, who led an unsuccessful push to turn PG&E into a customer-owned cooperative.

During an online hearing, U.S. Bankruptcy Judge Dennis Montali said he will issue a notice Wednesday outlining his plan to approve PG&E’s restructuring. The judge said he will schedule a hearing for Friday to iron out a handful of issues.

“I’m going to come to the conclusion that the plan should be confirmed,” Montali said.

An attorney for PG&E asked for an official order confirming the plan by Monday so the company can start selling $9 billion in equity to help fund its reorganization. It’s already sold $8.9 billion in investment-grade bonds and is raising $3.75 billion in junk bonds. As of Tuesday morning, the company had received about triple the number of orders it’s seeking for the high-yield notes.

Read More: PRICED: Pacific Gas And Electric $8.925b Debt Offering

On the morning of Nov. 8, 2018, in the foothills of the Sierra Nevada mountains, a faulty PG&E transmission line ignited what soon became a hell on Earth — a fire that soon consumed more than 150,000 acres, including the entire town of Paradise. It killed more than 80 people and destroyed nearly 19,000 homes, businesses and other structures.

PG&E, which serves about 16 million people in Northern and Central California, has made some crucial changes since collapsing into bankruptcy in the aftermath of the blaze. It has replaced 11 of its 14 board members and is allowing for additional state oversight, appointing an independent safety monitor and dividing operations into regional units to focus more on safety. The company will have a new chief executive officer after its current one, Bill Johnson, steps down at the end of the month.

As the judge prepared to announce his decision Tuesday, Johnson appeared in a California courtroom in Chico, some 20 miles from where the Camp Fire began. On behalf of the company, he pleaded guilty to 84 counts of involuntary manslaughter and one count of unlawfully starting a fire.

“PG&E will never forget the Camp Fire and all that it took from this region,” Johnson said. “We remain deeply, deeply sorry for the terrible devastation we have caused.”

READ MORE: PG&E Pleads Guilty to Killing 84 People in 2018 Camp Fire

Hours after Johnson spoke, the Butte County District Attorney, who prosecuted the utility, released a scathing 92-page report of his probe into the Camp Fire. The findings included that a broken metal hook supporting the power line that started the blaze was at least 97 years old. The tower that held the equipment was about 100 years old.

In essence, the prosecutor said, “PG&E blindly bought a used car. PG&E drove that car until it fell apart.”

In a statement, PG&E said it has made “substantial progress” toward emerging from bankruptcy as a financially stable company that is positioned to safely supply California with power and help meet the state’s clean-energy goal.

Critics, however, contend the reforms have yet to fully address the daunting operational challenges PG&E faces. Despite calls for the company to be broken up or turned into a government-owned entity, it will remain a colossal investor-owned utility. And it will emerge from Chapter 11 having nearly doubled its debt to more than $38 billion.

As recently as May, a federal judge overseeing PG&E’s criminal probation stemming from a fatal gas-pipeline explosion in 2010 excoriated the company, saying it continues to drag its feet on safety and calling it a “recalcitrant criminal.”

“If ever there was a corporation that deserved to go to prison — it is PG&E,” U.S. District Judge William Alsup said during a virtual hearing. “I’m going to do everything within my power to protect the people of California from further crimes and further destruction by PG&E.”

PG&E’s debt has raised concerns about its financial durability and its ability to make an estimated $40 billion in investments required to fire-proof its grid. In the meantime, the utility will need to resort to intentionally shutting off power to keep its lines from igniting fires during wind storms.

The company expects to officially exit bankruptcy at some point this summer, after it closes on the financing it has lined up to fund its reorganization. If PG&E gets into trouble again, California will have the option to take the utility over as part of an agreement with the state to back its reorganization plan.

“This company didn’t get much out of the bankruptcy that’s going to help it going forward,” said Jared Ellias, a bankruptcy law professor at the University of California, Hastings College of Law. “They are leaving bankruptcy basically having converted pre-bankruptcy claims into mostly debt they have to pay.”

One key advantage PG&E will have once it formally exits Chapter 11 is the option to participate in a state fund established to help utilities cover liabilities from future fires linked to their equipment.

In all, investigators blamed PG&E equipment for 21 fires in 2017 and 2018. PG&E’s downfall underscores the increasing vulnerability utilities face as wildfires and hurricanes become 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.

PG&E’s odyssey through Chapter 11 turned into a battle for control of the century-old company as some of the biggest names on Wall Street including Pacific Investment Management Co., Elliott Management Corp. and Seth Klarman’s Baupost Group fought over competing reorganization plans.

Judge Montali says he will confirm PG&E’s proposal despite concerns from some fire victims about whether they will get the full value of a $13.5 billion settlement to pay claims filed on behalf of an estimated 70,000 families and businesses devastated by fires.

Half of the settlement will be paid in stock that some victims worry may go down in value if PG&E is blamed for causing more wildfires this year. The trust could see a $2 billion shortfall in the value of its shares when PG&E emerges based on current stock price estimates, an attorney for fire victims said Tuesday during the bankruptcy hearing.

“Everyone here in Northern California really needs this company to succeed,” Ellias said.

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.

Source Article