A candle-lit bar at Reel and Brand in Sonoma, California, on October 9 2019, during a planned power outage by the Pacific Gas & Electric (PG&E) utility company. Picture: AFP/BRITTANY HOSEA-SMALL
A candle-lit bar at Reel and Brand in Sonoma, California, on October 9 2019, during a planned power outage by the Pacific Gas & Electric (PG&E) utility company. Picture: AFP/BRITTANY HOSEA-SMALL

Pacific Gas and Electric (PG&E) shares have plunged as it grapples with a court ruling that threatens to put the fate of the bankrupt power giant in the hands of outsiders — and perhaps wipe out the stock.

The shares dropped as much as 32% on Thursday after US bankruptcy judge Dennis Montali, the previous day, stripped PG&E of exclusive control over its recovery process.

The decision escalates an already-heated battle for control of the largest utility bankruptcy in US history. Montali agreed to let bondholders, including Pacific Investment Management and Elliott Management, pitch their own restructuring plan alongside PG&E’s, so they can both come up with ways the utility could deal with an estimated $30bn in wildfire liabilities. Some of PG&E’s bonds jumped to their highest levels in almost two years.

The damages, tied to blazes that its equipment ignited, forced the utility to file for chapter 11 in January. PG&E is simultaneously trying to manage an unprecedented blackout it has engineered to prevent new fires.

The loss of exclusivity is the latest twist in a massive bankruptcy case that has already attracted some of the biggest names in the financial world. A group led by Pimco and Elliott has devised a plan that would all but obliterate the stake of current shareholders in the utility.

“In the worst case, the competing plan could win and completely wipe out current shareholders,” Greg Gordon, an analyst at Evercore ISI, said in a research note. “In other words, zero is possible.”

PG&E filed for bankruptcy on January 29 to address liabilities resulting from a series of devastating fires that tore through Northern California in 2017 and 2018

Immediately after Montali issued his ruling on Wednesday, PG&E shares plunged by as much as 25%. It hit just as PG&E was cutting power to hundreds of thousands of homes and businesses in Northern California in the first phase of an orchestrated shut-off designed to keep its power lines from igniting blazes.

The creditors, including the fire victims, have “spoken loudly and clearly that they want their” proposal to be considered, Montali said in his ruling. While PG&E’s plan is “on track, as well as can be expected,” he wrote, so is the competing version from creditors. The court denied requests by other parties to let them offer recovery plans, too.

Dual track

“We are disappointed that the bankruptcy court has opened the door to consideration of a plan designed to unjustly enrich Elliott and the other ad hoc bondholders and seize control of PG&E at a substantial discount,” PG&E said in a statement.

Under bankruptcy law, a company has a limited amount of time to develop a re-organisation plan and persuade creditors to vote in favour of it. Initially, no other competing proposals are allowed, so the bondholders needed permission from Montali before they could proceed. It’s unusual for a bankruptcy judge to grant such a request.

“It’s a big deal, because now the shape of the re-organisation is no longer in existing management’s hands,” said Stephen Lubben of the Seton Hall University School of Law. “Whoever can persuade a critical mass of creditors, along with the regulators, that they have a good way forward will win. That could result in a very different plan than management envisioned when they went into chapter 11.”

PG&E filed for bankruptcy on January 29 to address liabilities resulting from a series of devastating fires that tore through Northern California in 2017 and 2018. The effects have been rippling through millions of ratepayers, hundreds of creditors, thousands of workers, and the state’s political system.

Two paths

The company has argued that ending its exclusive control before the company figures out its exact wildfire liabilities would “lead to further distraction, costs and waste” and would jeopardise the company’s chances of exiting bankruptcy by June 2020, a deadline set by the state.

Whether shareholders will actually suffer a total wipeout is open to question, because Montali’s ruling doesn’t shut down PG&E’s effort or necessarily favour its rivals.

“One plan emerging as confirmable is a very acceptable outcome,” Montali wrote. “And if both plans pass muster, the voters will make their choice or leave the court with the task of picking one of them.” He directed the noteholders to file their plan by October 17.

It’s not the first time the company has faced such a dilemma. PG&E’s utility unit filed for bankruptcy in 2001, and in that case, creditors were paid in full and shareholders kept considerable value.

Stock answers

Regulators and creditors might want to maintain a capital structure of at least 50% equity, typical for a utility, which would help PG&E sell new shares and debt. Political and public relations considerations could also emerge if pension funds, workers and individual shareholders with sympathetic stories weigh in.

“This would be devastating for my retirement,” shareholder Andreas Krebs of San Francisco wrote to the judge a day before the ruling. “Please consider the average person that has invested their hard-earned retirement money into PG&E. I don’t even know how to address the greed and gall of these creditors that would want to wipe out average people’s savings in order to profit by taking over PG&E.”

The utility previously said it has already lined up $34bn in debt financing for its own re-organisation plan. The company has also received more than $14bn in equity commitments. It has blasted the plan by Elliott and Pimco, saying it would lead to an “unjustified windfall” of billions of dollars for creditors at the expense of shareholders and utility customers.

Noteholders, meanwhile, said their efforts wouldn’t delay the bankruptcy case. They’ve joined forces with wildfire victims to pitch a plan that would pay out $25.5bn to victims and their insurers. Their campaign to end PG&E’s exclusive control is supported by the official committee of unsecured creditors, labor unions and fire victims.

Bloomberg