Breakingviews: PG&E faces judicial bankruptcy brownout

PG&E faces a brownout of its own – but this one is in court. The California utility has been powering down customers across its territory to avoid more fire-related losses as the wildfire season intensifies. Meanwhile on Wednesday, the judge overseeing its bankruptcy opened the door for creditors to file their own restructuring plan. Losing power over the process could be costly for the company, which helps explain why its shares lost another 30% of their value on Thursday morning.

Simplifying a complex exercise, the basic thrust of the two plans is this. PG&E wants to raise $34 billion of new debt and $14 billion of equity, ultimately leaving up to $8.4 billion for victims of past fires. The noteholders, including Elliott Management, propose injecting $29 billion in new money into the utility in exchange for new debt and a 59% equity stake. A big chunk of the stock would go into a trust for victims, meaning they would get up to $14.5 billion.

The judge proved sympathetic to the plan offering more to victims, who are also on board with it. The fact that the company’s plan left so much on the table for existing equity holders – the firm’s market capitalization was still nearly $6 billion prior to the judge’s order – was surely a factor, too.

Which plan actually emerges as the victor is hard to predict. It could well be a hybrid of the two, as it’s in both sides’ interests to get out of court soon so that the restructured PG&E qualifies for a state fund designed to help pay for damage from future fires. But existing equity owners may resist giving too much more to victims, since that will dilute what remains of their investment.

Either way, the judge will want the restructured company to look reasonably strong. After all, PG&E’s problems have a lot to do with Californian laws that leave utilities liable for fires caused by their equipment, even if they were not negligent. The company filed for bankruptcy back in 2001, too. With a court case involving another fire set to start in a few months and PG&E possibly on the hook when new blazes break out, a financial cushion is needed. Whatever plan the company and creditors settle on, it will have to be robust enough to do more than just turn the lights back on.

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