Things are getting scary for customers of California's biggest - and bankrupt - utility, PG&E: not only is the state rolling out unprecedented blackouts which threaten to put as many as 3 million California residents in the dark, but overnight U.S. Bankruptcy Judge Dennis Montali stripped PG&E of exclusive control over its recovery process, which threatens to put the fate of the bankrupt power giant in the hands of creditors and outsiders, wiping out the stock in the process.
Immediately after Montali issued his ruling late on Wednesday, PG&E shares crashed as much as 25%. Adding insult to injury, the ruling hit just as PG&E was cutting power to hundreds of thousands of homes and businesses in Northern California in the first phase of an orchestrated shutoff designed to keep its power lines from igniting blazes. The stock reaction was a dramatic wake up call for those PCG BTFDers who were hoping that the equity would be reinstated at a sizable valuation: PCG stock plunged as much as 32%, its biggest one-day drop since the January bankruptcy filing.
The creditors, including the fire victims, have “spoken loudly and clearly that they want their” proposal to be considered, Montali said in his ruling. While PG&E’s plan is “on track as well as can be expected,” he wrote, so is the competing version from creditors. The court also denied requests by other parties to let them offer recovery plans.
Under bankruptcy law, a company has a limited amount of time to develop a reorganization plan and persuade creditors to vote in favor of it. Initially, no other competing proposals are allowed, so the bondholders needed permission from Montali before they could proceed. It’s unusual for a bankruptcy judge to grant such a request.
Montali's decision to allow bondholders including PIMCO and Elliott Management pitch their own restructuring plan alongside PG&E’s - escalates an already-heated battle for control of the largest utility bankruptcy in U.S. history. According to bankruptcy court, the creditors can now propose their own ways for the utility to deal with an estimated $30 billion in wildfire liabilities. And since, any equity-negative decision is by definition credit-positive, some PG&E bonds soared to their highest levels in almost two years.
As Bloomberg reports, the loss of exclusivity is the latest twist in a massive bankruptcy case that has attracted some of the biggest names in the financial world.
As for the reason why the stock is crashing, it's because the creditor group led by Pimco and Elliott - which now can propose its own vision for the company - has devised a plan that would wipe out the stake of current shareholders in the utility.
“In the worst case, the competing plan could win and completely wipe out current shareholders,” Greg Gordon, an analyst at Evercore ISI, said in a research note. “In other words, zero is possible.”
Whether shareholders will actually suffer a total wipeout is open to question, because Montali’s ruling doesn’t shut down PG&E’s effort or necessarily favor its rivals.
A shocked PG&E, which is now facing a very uncertain future, issued a statement saying that "we are disappointed that the Bankruptcy Court has opened the door to consideration of a plan designed to unjustly enrich Elliott and the other ad hoc bondholders and seize control of PG&E at a substantial discount." The company had argued that ending its exclusive control before the company figures out its exact wildfire liabilities would “lead to further distraction, costs and waste” and would jeopardize the company’s chances of exiting bankruptcy by June 2020, a deadline set by the state.
Translation: the world will end if the company's equityholders are wiped out and the existing management team is shown the door... a typical response.
“It’s a big deal, because now the shape of the reorganization is no longer in existing management’s hands,” said Stephen Lubben of the Seton Hall University School of Law. "Whoever can persuade a critical mass of creditors, along with the regulators, that they have a good way forward will win. That could result in a very different plan than management envisioned when they went into Chapter 11."
PG&E filed for bankruptcy on Jan. 29 to address liabilities resulting from a series of devastating fires that tore through Northern California in 2017 and 2018. The effects have been rippling through millions of ratepayers, hundreds of creditors, thousands of workers and the state’s political system.
“One plan emerging as confirmable is a very acceptable outcome,” Montali wrote. “And if both plans pass muster, the voters will make their choice or leave the court with the task of picking one of them.” He directed the noteholders to file their plan by Oct. 17.
It’s not the first time the company faced such a dilemma. PG&E’s utility unit filed for bankruptcy in 2001, and in that case, creditors were paid in full and shareholders kept considerable value. This time, however, as a result of mounting legal liabilities, the chances the equity preserves some value are far lower, although as always in a case like this, political considerations come into play.
Regulators and creditors might want to maintain a capital structure of at least 50% equity that’s typical for a utility, which would help PG&E sell new shares and debt. Political and public relations considerations could also emerge if pension funds, workers and individual shareholders with sympathetic stories weigh in.
“This would be devastating for my retirement,” shareholder Andreas Krebs of San Francisco wrote to the judge a day before the ruling. "Please consider the average person that has invested their hard-earned retirement money into PG&E. I don’t even know how to address the greed and gall of these creditors that would want to wipe out average people’s savings in order to profit by taking over PG&E."
Here's a thought: perhaps the average person should not have invested their entire nest egg in a terribly run, massively overlevered organization. Then again, in a world in which everyone expects to be bailed out, can anyone blame Andreas for trying?