No one to root for in PG&E battle
There must be some value left in the sorry carcass that is Pacific Gas & Electric, California’s biggest utility company. Otherwise we wouldn’t be witnessing a free-for-all among Wall Street hedge funds and investment firms to take it over.
Indeed, value there is — billions of dollars’ worth. It’s going to end up under the control of big-money investors holding the company’s bonds, or big-money investors holding its stock, the two major groups fighting for the right to bring PG&E out of the bankruptcy case it filed in January.
The shareholder group is desperate to salvage the value of their stock, but proposes to inject more debt into the company, which would erode the value of the bonds. The bondholders want to maintain the value of their investments, in part by slashing the current shareholders’ ownership stake by 99.9% and issuing new shares to themselves. “Whoever loses is going to lose billions, and whoever wins is going to get a huge windfall,” says Mark Toney, executive director of the utility consumer group TURN.
One way or another, control of PG&E is sure to end up in the hands of investors with little record of long-term corporate management or evident commitment to the state’s goal of transforming its energy usage to renewable sources such as solar and wind power. One of the largest bondholders, the hedge fund Elliott Management, has been a heavy investor in oil, gas and coal companies.
What is hard to gauge is how far either investor group can be trusted to run PG&E for the benefit of its ratepayers and fire victims and in support of the state’s migration to clean, renewable energy sources.
“A key question is whether there will be decisions [by the hedge fund owners] that will undermine California’s clean energy goals and leadership,” says Kevin de Leon, a former president pro tem of the
state Senate, who specifically took aim at Elliott in a Sacramento Bee op-ed last month.
Another wrinkle is that changes in state law — prompted in part by the PG&E bankruptcy — reduce the utilites’ potential liability for future wildfires and give them more latitude to pass the costs of wildfire mitigation to ratepayers.
“Wall Street is not stupid,” says Loretta Lynch, a former president of the state Public Utilities Commission and a critic of those changes. “They get it that they can make money hand over fist from California businesses and families.”
The bankruptcy judge, Dennis Montali of San Francisco, raised that issue in August while pondering whether to allow the bondholders to propose a reorganization plan competing with a proposal put forth by the company’s management, representing its shareholders.
“If there were no victims to attend to, then perhaps the battles ... would be the bankruptcy equivalent of a proxy fight or a hostile takeover,” he observed. That outcome, however, would do nothing to advance the “repeated stated goal of compensating the victims.”
Only a few weeks later, however, the bondholders had crafted an alliance with the fire victims group and won favor with PG&E’s employees union, prompting Montali to change his mind and allow the bondholders to propose their competing plan.
Regulators and government leaders do have tools to keep whichever group ends up controlling PG&E focused on clean energy. Perhaps in recognition of that reality, both groups have explicitly committed to honoring its existing contracts with renewable energy firms (although PG&E did obtain a ruling from Montali that bankruptcy rules would allow it to reject the contracts if necessary).
The utility’s post-bankruptcy future is sure to involve rate increases for its customers. PG&E has already asked for a rate increase of 7.2% based on recoverable expenses it has incurred this year, and is asking the PUC for a further increase of about 12%, or more than $20 a month on the average residential bill, through 2022 as part of its triennial rate request.
Much can happen in the months before Montali has to choose from among the reorganization proposals. In the meantime, the bondholders are asserting that the company’s proposal aims to “entrench the parochial interests of an aggressive new subset” of stockholders.
The shareholders, for their part, said earlier this month in a court filing that the bondholders are pursuing a “‘screw them all!’ approach” aimed at wiping out the shareholders and feathering their own nests by granting themselves the original value of their bonds as well as nearly $672 million in fees.
If you think there’s no one to root for among the major players in this brawl, you’re right. Let’s take a look at the contestants.
First, Pacific Gas & Electric, which may be the most detested, and detestable, corporation in California, if not in the observable solar system. PG&E’s disregard for its customers and the communities it serves has been a byword for years. In 2010, the company spent millions of dollars quietly bankrolling a ballot measure that would have hamstrung public power competitors.
That was the same year that a PG&E gas line blew up in San Bruno, killing eight people and leveling an entire neighborhood. The company was later accused of having falsified gas pipeline records after the explosion. In 2016, PG&E was convicted by a federal jury on six criminal counts in connection with the blast, yet its leadership was so scornful of the outcome that not a single director resigned because of the conviction.
PG&E’s equipment sparked more than 1,500 fires from 2014 through 2017, according to state records. The harvest of its lax work in hardening its infrastructure against fire-prone vegetation during windy periods was the catastrophic fires of 2017 and 2018, the liability for which pushed the company to file for bankruptcy this year. This was its second bankruptcy, the first having come in 2001, in the wake of a botched state deregulation of the electric industry that the company had helped to design. That bankruptcy resulted in a surcharge on its customers’ bills for years totaling what Lynch says are “excess profits” of more than $3 billion.
That brings us to the company’s current stockholders, including the hedge funds Abrams Capital and Knighthead Capital, which own nearly 10% of the company’s more than 500 million shares. The funds bought shares for as little as $6.37 just prior to PG&E’s bankruptcy filing. Since then, as expectations for the bankruptcy case’s outcome have swung between optimism and pessimism, the share price has oscillated wildly, reaching as high as $23.72 in April. The shares are currently trading for less than $8.
The shareholders and their associates in management say the bondholders’ plan would give too much away to wildfire claimants with inflated or questionable claims. They maintain that their proposal would allow for the quickest exit from bankruptcy and “fairly compensate [victims] for wildfire losses ... without a windfall for those seeking excessive or inappropriate amounts.” The company says that it’s “on track” to complete its reorganization by June 30, a deadline imposed by state law, and that it has received commitments for $14 billion in new equity investments.
The shareholding funds helped remake PG&E’s management with the appointment of William D. Johnson, former head of the Tennessee Valley Authority, as CEO in April. But under their leadership the company has continued its record of missteps. Some elements of the multimillion-dollar pay package for Johnson drew fire from the U.S. bankruptcy trustee in July. Montali rejected a $16-million bonus plan for 12 top executives in August, though he had approved a $235-million bonus plan for 10,000 lower-level employees in April.
The shareholders’ newly appointed board of directors, which is notably light on members with a record of public service, earned a brickbat from Gov. Gavin Newsom, who noted its dominance by “hedge fund financiers, out-of-state executives and others with little or no experience in California and inadequate expertise in utility operations, regulation and safety.”
Newsom added that with the appointments, PG&E was sending “a clear message that it is prioritizing quick profits for Wall Street over public safety and reliable and affordable energy service.”
Then came this year’s fire season, when PG&E tried to keep its equipment from igniting more fires by instituting blackouts across great swaths of Northern California. (Other utilities took similar but less expansive steps in their regions.)
The blackouts caused widespread misery, including losses of foodstuffs and other irreplaceable perishables as well as life-threatening shutoffs of electrified health equipment. The strategy wasn’t the fault of the current management, exactly, but reflected how few options PG&E still has to deal with wildfire threats after years of unpreparedness.
As for the bondholding group, its most notable member is Elliott Management, which is run by Paul Singer, an investor of renowned aggressiveness. He’s known for buying into troubled enterprises and forcing their reorganization, sometimes in ways that made a company more efficient, but sometimes in ways that produced accusations that his own interests outweighed those of the target and its stakeholders.
In perhaps his most celebrated escapade, Singer bought hundreds of millions of dollars in Argentine bonds, and after the financially strapped country defaulted, stood fast against its efforts to restructure the loans — at one point attempting to impound an Argentine naval frigate, the Libertad, when it made port in Ghana. (After a twomonth standoff, an international court ruled the ship was immune from seizure.) In the Argentine case he won his bid for a big payout on his bonds, but his efforts arguably left the country in worse economic and fiscal straits than it would have faced otherwise. In the PG&E case, the bondholder group that includes Elliott Management has shown more of a velvet glove. The group’s reorganization proposal offers the 2017/2018 fire victims a better payout than the shareholder and management group, on more liberal terms. The group says it’s prepared to invest nearly $30 billion in PG&E, including about $14 billion for existing wildfire victims.
And unlike the shareholder and management group, it has reached out to the politically influential International Brotherhood of Electrical Workers, winning its crucial support for allowing the bondholder group to issue a reorganization plan in competition with the shareholders. Employees and ratepayers would each get a seat on the PG&E board.
Among other things, the group pledged not to seek to break up PG&E and has offered to protect the pension funds for employees and retirees from some losses stemming from the bankruptcy.
“Ironically, we’ve gotten a lot more transparency from Elliott, who’s perceived as the devil incarnate in many circles, than we’ve had from the four hedge fund people on the PG&E board,” Tom Dalzell, business manager of IBEW Local 1245, which represents some 18,000 employees of PG&E and its contractors, told me.
“There’s no moral high ground between the bondholders and the shareholders,” Dalzell said. “Elliott’s really plain and clear that they want to make money. I don’t have any more qualms about trusting them than I do about trusting the others.”