January 25, 2019

Breakingviews: BlueMountain is tardy with PG&E activism

by Breakingviews.

BlueMountain Capital Management is a recent arrival to activism – but a latecomer to the tale of PG&E’s decline. The hedge fund, which built its reputation on credit investing, owns 2 percent of the California utility’s shares and wants to oust its directors after they said the company would file for bankruptcy protection. But BlueMountain is short of time to rouse bigger, longer-term owners who have watched PG&E stumble.

One question is whether the company is really in existential financial trouble. PG&E estimates possible liabilities from the huge Camp Fire and other wildfires at $30 billion or more, but that’s by no means a certain figure, as Thursday’s exoneration over a 2017 fire shows. BlueMountain says pretty much everyone will be worse off if the company goes into bankruptcy, and the still meaningful $14 share price at the close on Thursday – although down from nearly $50 in November – suggests other investors agree it has value as a going concern. Yet U.S. companies are allowed to file long before they strictly need to, and sometimes do so to make it easier to shore up their finances.

Another of BlueMountain’s concerns is a series of missteps it blames on PG&E’s directors. These date back at least as far as 2010. Several current board members were around that year when a pipeline explosion in San Bruno ultimately left the company with a felony conviction. PG&E, currently led by interim Chief Executive John Simon, has said it will look for new directors, but in the meantime prior accidents have weakened its standing with state regulators and legislators.

BlueMountain plans to nominate new directors by the middle of next month in anticipation of the company’s annual meeting, which is set for May. That won’t stop PG&E from filing for bankruptcy, which it is likely to do next week. But it could give BlueMountain a louder voice in the process – and, if successful, revamp the board’s capacity to handle future challenges.

Some other shareholders may well support BlueMountain. However, the firm only started building its equity stake last fall – before the second bout of recent wildfires but well after some of PG&E’s other disasters. Longer-term owners haven’t shown such frustration to date, and it may take more than one inexperienced activist to rouse enough of them.

(This item has been updated in the second paragraph and Context News to reflect California’s determination of the cause of the Tubbs Fire in 2017.)

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