DJ BlueMountain Pushes Back Again Over PG&E's Bankruptcy Plan -- Barrons.com

By Teresa Rivas

Stock in the California utility PG&E was surging Tuesday afternoon, after another plea from BlueMountain Capital to delay a Chapter 11 bankruptcy filing.

Where we were: BlueMountain already argued that the decision to seek bankruptcy protection had been made too hastily, although that didn't do much for the stock.

Where we're headed: A look back at 2001, when PG&E's utility subsidiary filed for Chapter 11, isn't as instructive as one might think, notes Morgan Stanley .

PG&E jumped nearly 10% on Tuesday, after BlueMountain Capital sent yet another letter to the California utility, arguing it should at least delay a bankruptcy filing until its annual shareholder meeting, scheduled for May 21. "You have publicly stated that bankruptcy is in the best interests of all stakeholders. But you have failed to articulate a single cogent reason for why it is beneficial to any stakeholder," the letter reads, arguing that a number of stakeholders would be harmed by the move.

"Following a comprehensive review with the assistance of outside experts and at management's recommendation, the PG&E board unanimously determined that initiating a Chapter 11 reorganization for both the utility and the corporation is the only viable option for PG&E and will maximize the value of the enterprise for the benefit of all stakeholders, " a company spokesperson told Barron's in an email.

As a reminder, investors have been worried for some time about PG&E's situation. Estimates for its liability stemming from California's wildfires in 2017 and 2018 run as high as $30 billion. Earlier this year, it seemed that bankruptcy was all but inevitable, following a decision by the company's board, but plenty of shareholders are, not surprisingly, unhappy with that call. The stock has plummeted. BlueMountain argued that the company should reconsider, and called a potential bankruptcy filing "damaging, avoidable, and unnecessary."

Some investors may be wondering if 2001 could provide a road map for PG&E's latest spot of trouble. That's the year when its utility subsidiary sought Chapter 11 protection after it racked up $9 billion in debt buying electricity during California's energy crisis, and negotiations with Gray Davis, governor at the time, appeared to be breaking down.

Morgan Stanley's Stephen Byrd argues that there are important differences between then and now. First, back in 2001, PG&E was saddled with cash-flow losses that needed a quick solution to avoid "severe liquidity and solvency issues." The company was buying power on the open market at high prices, while being required by law to sell that power to customers at a much lower rate. Today, there isn't a similar, immediate cash-flow drain.

Another difference is that in 2001, PG&E was dealing with a "serious, but discrete, issue," during the state's energy crisis, as opposed to today, when it's staring down the "potentially open-ended liability for future wildfires." These disasters aren't likely to stop happening, and Byrd counts as many as a half dozen potential approaches to dealing with wildfires in the future. He notes the risk that none may be approved for "an extended period of time given the contentiousness of the issues involved."

Then there's the fact that unlike in 2001, both the parent company and the utility subsidiary are looking to enter the Chapter 11 process, not just the latter. This is exerting more pressure on the stock because, Byrd says, some investors may be prohibited from owning stock if a parent company is reorganizing under Chapter 11.

There is one key similarity, however: Byrd points out that in 2001, PG&E wanted to separate its utility assets into separate subsidiaries that would be subjected to "limited, if any, regulation by the state." The company abandoned the plan during the settlement process in 2003, but he says that if it were able to go through with such a separation now, there would be "significant potential value from such a move."

Assets related to gas transmission and storage and electric generation have a lower risk of causing fire, and the problematic electricity-transmission operation could "recover costs under a more straightforward federal cost recovery regime," Byrd says.

Some investors have also wondered if Chapter 11 is even legally available to PG&E. Byrd writes that Chapter 11 requires a "good faith" filing, and can't be a simple attempt to gain an advantage in litigation.

The real problem, however, he says, isn't the potential for an imminent liquidity crunch, or legal minutiae, but the "fundamental issue affecting PG&E: the potential for very large liabilities associated with future wildfires under California's inverse condemnation rule, and the challenges in obtaining financing given these potential liabilities.

"Without fully addressing this issue, we believe it may be challenging for PG&E to have access to the capital markets in the future to fund its (likely increasing) capex budget," Byrd says.

Inverse condemnation allows the state to require utilities to pay for property damage from a fire without proving negligence or fault.

A bankruptcy court wouldn't likely have the ability to overturn or modify the inverse condemnation rule, but it could help in the sense that it might allow for the separation of the electric transmission unit, and reduce spending on non-safety projects, among other advantages. Byrd has an Equal Weight rating on the stock.

PG&E was up 9.4% to $7.91 in recent trading.

Make the Connection

PG&E has made changes to its board.

Investors have worried what penalties it might face.

Write to Teresa Rivas at teresa.rivas@barrons.com

(END) Dow Jones Newswires

January 22, 2019 15:23 ET (20:23 GMT)

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