Who gets to control PG&E? Hedge funds, wildfire victims await critical ruling

Oct. 7--SAN FRANCISCO -- A group of Wall Street hedge funds has a plan for snatching control of PG&E Corp as the troubled utility tries to navigate a bankruptcy case driven by billions of dollars in damages from the state's devastating wildfires.

But the hedge funds' efforts have been put on hold at least temporarily, while a judge decides whether to allow these investors to press ahead with their plan right away or wait for PG&E's own plan to percolate.

U.S. Bankruptcy Court Judge Dennis Montali deferred an immediate ruling Monday after hearing nearly four hours of argument on an issue that could determine who winds up owning California's largest utility company.

PG&E has already submitted a proposal for paying wildfire claims and other debts, while the company's powerful bondholders have submitted a competing plan that has the blessing of lawyers representing tens of thousands of victims of the 2017 and 2018 mega-fires that ravaged Northern California.

Although he didn't rule, the judge appeared skeptical of opening up the bankruptcy case to a competing plan, saying he feared it would gum up the proceedings and hinder quick payments to fire victims.

"A battle over corporate control ... has nothing to do with paying victims," the judge said. "Do the victims want to get bogged down on that kind of battle?"

Victims' attorneys, however, said the utility hasn't put nearly enough on the table, and the bondholders' plan represents their best chance of getting paid what they're owed. "We don't believe there's much more gas left in (PG&E's) tank," said Cecily Dumas, a lawyer for the victims.

The bondholders' plan puts more than $5 billion on the table for fire victims. If a prolonged takeover fight "gets me $5 billion more, I will wait," said Richard Marshak, another lawyer for the victims.

Time remains a huge consideration. PG&E must exit bankruptcy by next June to be eligible for the insurance fund established by the Legislature in AB 1054, which is designed to cushion utilities against damages from future fires. If PG&E's bankruptcy plan falters, there won't be enough time for the bondholders to start their plan from scratch, victims' lawyers said.

Montali in August rejected a request by the bondholders to proceed immediately with their takeover plan, saying an open competition would drag out the court case and delay payment to wildfire victims.

But then the bondholders, led by New York hedge fund Elliott Management, pulled off a major coup by forging a partnership with those victims, who wield considerable influence as the most sympathetic figures in the multibillion-dollar PG&E drama.

Under a plan jointly submitted to the bankruptcy court, the bondholders would pay $14.5 billion to pay fire victims for damages not covered by insurance, plus $11 billion to compensate insurers for payments they've made to their policyholders.

PG&E, by contrast, has a deal in place to pay insurers $11 billion -- the same amount as the bondholders offered -- but has said it plans to cap payments to wildfire victims at $8.4 billion, considerably less than what the bondholders say they'll pay.

PG&E's lawyers defended the utility's approach. They said the company can't legally offer the fire victims a sum comparable to the bondholders' plan without proof that the fire damages not covered by insurance are as high as the victims' claims.

"We don't have evidence of the validity of the claims," said PG&E lawyer Stephen Karotkin. "What we can't do is just accept their word for it." He said PG&E will offer more money to the victims if a settlement, or the court's "estimation" process for determining damages, yields a higher number.

He urged the judge to appoint a mediator to find common ground between the $8.4 billion offered to the victims by the company and the $14.5 billion offered by the bondholders.

"That gap can be bridged," the PG&E lawyer said. "Give us a chance to get a global consensus."

Any over-payment would come at the expense of PG&E's existing shareholders -- and leave them with nothing if the bondholders succeed in taking over the company, according to the utility's lawyers. The company argued that it's legally obligated to protect the financial interests of all creditors, including the shareholders.

"This is an embodiment of a 'screw them all!' approach," a consortium of major PG&E stockholders said in court papers. The quote was a reference to a recent email from a victims' lawyer, Frank Pitre, to a representative of the bondholders.

The actual size of the victims' damages remains the X factor in the bankruptcy. Hearings are set to begin in January, including a full-blown trial on whether PG&E owes any money in the October 2017 Tubbs Fire, to sort out the total amount owed to the fire victims.

PG&E lawyers also said the bondholders' plan would leave the company with billions in high-interest debt that would eventually cost ratepayers billions of dollars. The bondholders have said their plan wouldn't raise rates.

The bondholders' payment would come in a 50/50 mix of cash and PG&E stock. If their plan succeeds, the bondholders would own 59 percent of the utility; victims and insurers would own 40 percent. Existing shareholders, including CalPERS and CalSTRS and a host of hedge funds, would see their investments erased. The two California pension funds own roughly $20 million worth of PG&E stock combined, a small fraction of the more than $600 billion in assets they hold.

But before the bondholders could begin selling their plan to other creditors, they had to get Montali's permission to end PG&E's "exclusivity window," the period in which PG&E has the sole right to offer up a proposal. That window is due to expire Nov. 29, and PG&E wants to extend it at least two more months.

The bondholders have other allies. A consortium of unsecured creditors, including PG&E vendors, urged Montali to open up the case and allow the bondholders to proceed with their offer. Another powerful constituency, Local 1245 of the International Brotherhood of Electrical Workers, also argued for letting the bondholders move ahead, saying in court papers that PG&E "has made too little progress" with its plan.

Tom Dalzell, the local's business manager, said in a blog post that the bondholders' plan "appears to be much more favorable to PG&E employees and retirees than the plan filed by PG&E." The local represents thousands of PG&E workers.

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