Hedge funds fight over wreckage of PG&E. How much will California wildfire victims get paid?

Sep. 3--Dueling packs of Wall Street hedge funds are waging a down-to-the-wire battle for control of PG&E Corp. But it's wildfire victims from places like Paradise and Santa Rosa who could tip the balance.

Two billionaire investor factions are fighting over AB 235. That's a controversial bill being drafted that PG&E says it needs to exit bankruptcy and pay billions of dollars in claims from the 2017 wine country fires, which killed 44 people, and last November's Camp Fire, which killed 86 people.

The bill, by Assemblyman Chad Mayes, R-Yucca Valley, calls for the state to borrow up to $20 billion at tax-free, low interest rates on PG&E's behalf -- and says PG&E shareholders will repay the debt out of future profits.

But a consortium of hedge funds that own billions of dollars worth of PG&E corporate bonds is working behind the scenes in Sacramento, and with a marketing campaign aimed at pressuring lawmakers, to kill the effort. Separately, the bondholders are attempting a hostile takeover of PG&E through the bankruptcy case, with their own plan for paying fire claims -- and scuttling AB 235 could strengthen their hand considerably.

In a strange-bedfellow alliance, the bondholders -- whose leader, Paul Singer of hedge fund Elliott Management, is a supporter of President Donald Trump -- have teamed with left-leaning organizations such as Californians for Energy Choice and The Utility Reform Network to try to sink AB 235. The California Teachers Association also came out against the bill.

Their main argument: The plan would force ratepayers, not shareholders, to actually foot the bill for wildfire claims by putting pressure on the state to increase PG&E's profits.

"Are you willing to pay higher utility bills to bail out PG&E?" says the narrator of an anti-AB 235 radio ad sponsored by the bondholder group.

PG&E and its allies -- a collection of hedge funds that own 49 percent of the utility's stock -- insist customers wouldn't pay a dime under AB 235. It has lined up support from such groups as the California Wind Energy Association and the California Building Industry Association.

As the debate intensifies, the PG&E group has gone on the offensive against the bondholders, accusing them of trying to thwart the bill so they can steal the company from "mom and pop" shareholders and pension funds like CalPERS and CalSTRS, which represent 2.5 million retired public employees.

The bondholders' takeover plan would value the company at the equivalent of $2 a share, wiping out most of the value of existing shareholders, according to PG&E. The $2 price is about one-fifth of PG&E's current per-share value.

That the two sides are waging war over a bankrupt company speaks to PG&E's potential. Experts say California's largest utility could be an investment goldmine once it clears up its debts and exits bankruptcy. Billions of dollars are on the line -- the classic ingredient for an end-of-session legislative battle.

AB 235 must reach Gov. Gavin Newsom's desk before the Legislature adjourns Sept. 13. That could be a difficult task in light of PG&E's toxic reputation among several lawmakers. Newsom hasn't taken a position on the bill.

"I think it's a very heavy lift to get legislation like that through, at the very end (of session)," said Republican Assemblyman James Gallagher, whose district includes Paradise and other areas devastated by the Camp Fire.

Gallagher opposes the bill, saying PG&E is only pushing AB 235 "to ward off a takeover" and hasn't done enough for Paradise residents to justify help from the state. "Step up to the plate. Tell me what you're going to to do get this community back on its feet," he said.

Who is more powerful?

Fire victims are withholding support, too. But that could change.

Sacramento lobbyist Patrick McCallum, who lost his Santa Rosa home in the 2017 Tubbs Fire and runs an organization called Up from the Ashes, said his group would endorse AB 235 -- but only if PG&E negotiates a settlement of fire claims over the next week or so.

Whether that would make a difference in AB 235's fate is unclear. Disaster victims can wield considerable political power, as when 9/11 emergency workers successfully lobbied Congress earlier this summer for billions of dollars in benefits. McCallum is attempting to leverage the wildfire victims' sympathy quotient in the Legislature to goad PG&E into a deal.

"We're in a strong position right now and we're trying to use the position to get the victims a quicker and fair settlement," McCallum said. "PG&E is desperate around this legislation."

Spokesman James Noonan said PG&E's goal is to work with everyone involved to "fairly compensate wildfire victims." Even if PG&E doesn't know how much it plans to compensate victims, the utility has promised to submit a bankruptcy reorganization plan Sept. 9.

PG&E and its shareholder allies say consumers have nothing to fear from AB 235 -- and fire victims have everything to gain. Because investors aren't taxed on government bonds, the state could issue the "wildfire victim recovery bonds" at lower interest rates, saving PG&E money as it prepares to exit bankruptcy.

That's good for everyone, PG&E argues.

"There is not a single iota of bailout in this," PG&E Chief Executive Bill Johnson told reporters recently. He said fire victims should rally behind the legislation: "Help us get out of bankruptcy and we'll make sure your claims are paid."

The battle between the hedge funds has been brewing for months. In April, the shareholder group, led by the Knighthead, Redwood and Abrams Capital hedge funds, brokered a deal that installed Johnson, the former head of the Tennessee Valley Authority, as chief executive.

The shareholders in August committed to injecting up to $15 billion of fresh capital into the company, to augment the funding from the AB 235 bonds, according to regulatory filings.

The bondholders, led by Elliott Management, made their move earlier this summer. In a filing in Bankruptcy Court, they offered PG&E $20 billion in new capital, plus billions more in debt financing, to pay fire claims and other liabilities. In exchange, they want 95 percent of the company's stock. That would give them control over one of the nation's largest utilities.

Multiple battles at once

Inside the Capitol, the fight is entering a critical phase. AB 235 is a "gut-and-amend" bill that must clear certain legislative hurdles, and quickly. Bill supporters need a waiver from legislative leaders to move AB 235 forward, and have until Friday to amend the language on the floor. Both houses must approve the bill by Sept. 13, when lawmakers go home for the year.

If the bill fails this year, PG&E could try to resurrect it in January. But passing the bill next year would be even harder. The bill would need a two-thirds super-majority in order to take effect right away, and PG&E needs to have a wildfire payment plan in place quickly so it can exit bankruptcy by June 30.

That's the deadline set by the Legislature to allow PG&E to participate in a utility insurance fund lawmakers created in July to pay claims from future wildfires.

Putting more pressure on PG&E is the threat of litigation over the Tubbs Fire. In August, Bankruptcy Judge Dennis Montali said victims of that fire, which killed 22 people in Santa Rosa in October 2017, could sue PG&E even though Cal Fire said the fire wasn't the utility's fault. That could add billions to PG&E's wildfire tab.

How much is needed in total to pay for wildfire damages? That's far from certain.

Victims' lawyers have said in court papers that the claims could total $54 billion. The bondholder group, in bankruptcy court papers, has indicated it would offer up to $18 billion. The PG&E shareholder group, in a recent filing with the Securities and Exchange Commission, said it would go as high as $16 billion.

Johnson told reporters that $18 billion would probably be the "low end" of what's needed to satisfy claims. He said that figure includes some dollars for Tubbs Fire victims, although he wouldn't elaborate.

Whatever the final sum is, the utility's CEO insists PG&E needs the state's help in getting money to fire victims.

"We don't have $18 billion in cash," he said. "This is the most efficient way to raise the most amount of money in the shortest amount of time ... with no impact on customers, on anybody but the shareholders."

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