SACRAMENTO, Calif.--(BUSINESS WIRE)--Today, Elliott Management Corporation, one of Pacific Gas and Electric Company’s (“PG&E” or “the Company”) largest creditors, issued the following statement regarding the best path forward for PG&E:
A.B. 1054, passed by the California State Legislature and signed into law last July, mandates that in order to benefit from the wildfire fund, PG&E exit from bankruptcy by the end of June 2020 with a plan that meets critical safety, reliability, affordability and accountability standards. The requirements for plan proponents to comply with A.B. 1054 are understood to include:
(i) |
a reconstituted board of directors with significant representation from independent experts who are dedicated to serving the public interest; |
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(ii) |
a detailed long-term plan for safety improvement and modernization of infrastructure, including enhanced spending on system hardening to be locked in (both in terms of amount and timing); |
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(iii) |
a long-term sustainable capital structure resulting in strong credit metrics; |
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(iv) |
maintenance of the current authorized return-on-equity, with no additional earnings enhancements for shareholders; |
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(v) |
customer rate growth not to exceed projected economic growth; and |
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(vi) |
certain pre-defined off-ramp / transfer of ownership mechanisms in case requirements of A.B. 1054 are not met. |
A.B. 1054 passed with the singular focus of making the largest utility in the State of California stronger for its key stakeholders: customers, employees, regulators, investors and all citizens of California.
Instead of embracing the State’s objectives, PG&E is currently apparently seeking rubber-stamp authorization to proceed with a reorganization plan that meets none of the guidelines despite a statement by Governor Newsom’s counsel in bankruptcy court that the Company plan does not satisfy A.B. 1054. Instead, the Company’s plan benefits only a small group of its current shareholders at the expense of the utility’s other key stakeholders. This plan jeopardizes both the immediate-term and long-term health of the Company and its critical infrastructure. Notably, PG&E’s plan would:
- Increase the Company’s debt load to over $34 billion, more than $10 billion greater than when PG&E filed for bankruptcy in January 2019, including $7 billion of parent company debt, likely leaving PG&E Corp. as a sub-investment grade, junk-bond issuer;
- Divert cash flow to pay over $1 billion annually in excess interest and shareholder payments, significantly limiting dollars that PG&E has available to spend on and invest in critical safety upgrades and infrastructure hardening;
- Create a slush fund comprised of over $8 billion of corporate federal and state tax breaks siphoned from PG&E California utility customers for the exclusive benefit of PG&E’s existing shareholders;
- Request rate recovery of over $5 billion of costs related to the Tubbs fire to the direct benefit of PG&E’s existing shareholders but at the direct expense of California ratepayers;
- Risk leaving wildfire victims, who will become shareholders of PG&E, exposed to over $5 billion dollars of additional liability (related to litigation over the optional redemption of bonds) after the Company exits from bankruptcy;
- Greatly increase the likelihood that PG&E would face future financial distress and find itself back in bankruptcy;
- Compensate victims of past wildfires with materially less cash and shares in the reorganized Company at a materially higher valuation, resulting in individual plaintiffs receiving nearly $1 billion less in value than they would receive through the alternative plan proposed by the Ad Hoc Bondholders;
- Make no commitments to PG&E’s frontline utility workers, who put themselves in harm’s way on a daily basis to maintain the power system; and
- Keep PG&E’s largest existing shareholders, the board members they appointed solely to maximize equity value, and the same management team in charge of the Company.
The PG&E plan is not in the best interests of California residents, small businesses and commercial and industrial customers within PG&E’s service territory. It was crafted with the exclusive objective of maximizing value for existing shareholders at the expense of the Company’s critical stakeholders, including most importantly its customers and employees. Far from creating a “reimagined utility,” the PG&E plan leaves the company substantially more levered and more vulnerable, with an inferior governance and oversight structure.
We believe there is a better path – one that takes a fresh approach to governance, management, system-hardening, rate-neutrality, the treatment of workers and PG&E’s future financial health.
The Company has now entered into three settlements with wildfire victims, insurance companies, and certain public entities totaling $25.5 billion. Notably, the most recent $13.5 billion settlement reached with the wildfire victims came as a direct result of the Ad Hoc Bondholder Committee’s efforts to provide a fair settlement to uninsured and under-insured fire victims after PG&E attempted to pay them $5 billion less. With the burdens of costly and uncertain claims estimation litigation now almost certainly resolved, we urge the State to mandate that any emergence plan for PG&E must contain the following key features:
- Overhaul governance and management and create an entirely new culture focused on safety, reliability, accountability, workers and customers;
- Limit total debt to a moderate level and eliminate any financial engineering of potential holding company debt thereby limiting interest expense that gets passed on to ratepayers;
- Maintain strong cash flow for spending on and investment in critical wildfire safety mitigation and infrastructure hardening for the foreseeable future;
- Ensure moderate customer rate growth in line with economic growth;
- Maximize compensation to victims of past wildfires caused by PG&E; and
- Place ownership in the hands of long-term investors with a real stake in the State of California.
Jeff Rosenbaum, portfolio manager at Elliott Management, said, “It is clear that only a reorganization plan that puts PG&E in a meaningfully stronger financial position than when it entered bankruptcy, while compensating wildfire victims fairly and maintaining true rate-neutrality, should be allowed to move forward. Currently, the Ad Hoc Bondholder Committee plan achieves many of the State’s core goals as it overhauls PG&E’s governance, management and accountability, provides unmatched funding for safety and system hardening to avoid future fire events and power shutoffs, and makes commitments to PG&E’s workers to ensure that PG&E can attract and retain talented employees when it needs them most.”
The citizens of California deserve a reimagined PG&E that is financially healthy and well positioned to meet California’s power needs in the present while investing for the future so that PG&E can continue to provide critical electric and gas service safely, reliably, and affordably to millions of its customers.
Illustration of key elements of both plans:
| Topic | Bondholder plan | Equity plan |
| Commitment to employees | Fair compensation for employees, extension of IBEW contract |
No forward commitments to union employees |
| Management and board | Completely revamped with meaningful public interest representation and accountability |
Same management, not commitment to turning over hand picked hedge fund board members |
| Safety spend and system hardening | Billions of dollars in excess of company plan | Only what is required in A.B. 1054 |
| Investor base | Majority long term mutual funds | Entirely transactional hedge funds |
| Financing for plan | Fully financed long term capital | Equity backstop by hedge funds, 364 day bridge loan on $34 billion of debt financing |
| Holding company debt | None | $7 billion |
| Annual interest expense | $1.2 billion per annum | $1.6 billion per annum |
| Value to tort victims | Higher cash on emergence, more attractive value of equity. Total value nearly $1 billion in excess of equity plan |
Dependent on company cash flow and tax attribute usage. Equity subject to meaningful risk |
| NOL usage | Remains in the company to fund investment in system and to benefit ratepayers |
Used to pay wildfire liabilities and distributions to equity hedge funds (>$500 million per year) |
| Cash flow | Over $1 billion per year higher | Over $1 billion per year lower |
| Tubbs cost recovery | Commitment to no recovery on legacy fires | Intention to seek ratepayer funded cost recovery |
| Optional redemption claim contingency | None | Over $5 billion, potentially paid by ratepayers |
About Elliott
Elliott Management Corporation manages two multi-strategy funds which combined have approximately $38 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest funds of its kind under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.
