By Robert Mullin

Attorneys in the Pacific Gas and Electric bankruptcy case sparred Wednesday over the merits of their competing reorganization proposals, taking potshots at each other’s plans but not scoring any obvious points with the judge overseeing the proceeding.

The hearing was the first since U.S. Bankruptcy Court Judge Dennis Montali ended the utility’s exclusive right to submit a restructuring plan. The decision allowed the company’s unsecured bondholders to submit their own proposal, which has won the support of a group representing wildfire victims, the court-appointed Tort Claimants Committee (TCC). (See Judge Admits Takeover Plan as PG&E Starts Blackouts.)

The hearing also coincided with PG&E’s announcement that it would cut power to customers in 17 Northern California counties in the second series of public safety power shutoffs (PSPS) orchestrated this month to prevent wildfires.  The blackouts commenced Wednesday morning and continued into Thursday.

The bondholders’ attorney, Michael Stamer, came out swinging early in the hearing. He disparaged the feasibility of PG&E’s reorganization plan and urged Montali to schedule a confirmation vote for the bondholder proposal as soon as possible — a move that would effectively prioritize the plan over the utility’s.

“We think the most efficient way to get to the end zone — which is confirmation [of a plan and] satisfaction of AB 1054 — is to allow our plan to go first,” Stamer said, referring to the new California law that allows PG&E to draw on a $21 billion fund to cover wildfire damages if it wraps up its reorganization by June 30, 2020. (See Calif. Wildfire Relief Bill Signed After Quick Passage.)

Stamer said the bondholder plan would also accelerate a separate state court proceeding convened by Judge James Donato to settle wildfire victims’ claims against PG&E over the October 2017 Tubbs Fire, which killed 22 people and leveled a section of Santa Rosa. (See PG&E Bankruptcy Split into Three Parts.) He contended the plan would “remove the burden” from Donato to estimate damages because bondholders have already negotiated a settlement with the TCC to cover claims of up to $13.5 billion for that fire. The PG&E plan caps the claim amount at $6.9 billion.

Montali was skeptical of Stamer’s argument.

“There’s a whole group of lawyers on the other side who think the burden is not gone — it’s still there. It’s called evaluation,” Montali said, questioning whether the bondholder’s plan might “overpay” tort claimants at the expense of other parties.

Montali added that the bondholder plan might be “DOA” if Donato “puts a larger number” on the claim.

“Our plan is DOA if he puts a very small number on them,” Stamer retorted. Nevertheless, the parties supporting either plan would have to “scramble” if the settlement lands between $6.9 billion and $13.5 billion, he said.

“They’ll scramble to come up, and we’ll scramble to come down,” he said.

Stamer said the “biggest difference” between the two plans is that PG&E’s financing is contingent on the $6.9 billion top-end estimate for potential Tubbs Fire claims.

“Unequivocally, they have to get Judge Donato to say that there is less than $6.9 billion of tort claims, or their financing disappears,” he said.

Montali pointed out that PG&E has said it will come up with additional financing if needed.

“We actually refer to that as the ‘stroke of the pen’ argument,” Stamer replied. “The debtors are of the view that if they get a different view from Judge Donato, with the stroke of a pen, what we will do is we will raise more money.

“So, here’s one of the fundamental problems — the world doesn’t work that way. No. 2 is the bulk of their money coming from equity holders. Setting aside the $30 billion of bridge loans, it has to come from equity holders.”

“You might say that doesn’t happen in the real world, and I might agree with you. That’s why you schedule a hearing — to prove the feasibility,” Montali said.

The judge firmly rebuffed the notion that he could shelve PG&E’s plan in favor of the bondholders.

“I have to do what the [bankruptcy] code says … and I don’t think it says I can dump a debtor’s plan because another plan is confirmable,” Montali said.

No Altruists

PG&E attorney Stephen Karotkin complained that Montali’s decision to terminate PG&E’s exclusivity “has not worked to promote a consensus” in settling on a reorganization plan.

“As we told you, the [Ad Hoc Committee of Unsecure Bondholders] and the TCC have become polarized entirely and now want to move forward with their own plan. That’s not the way it should work,” Karotkin said.

“At the exclusivity hearing, your honor, the TCC made very clear to you that they would only engage in mediation if you agreed to terminate exclusivity,” he said. “Having done that, we say to your honor, now is the time to promptly appoint a mediator. That is the way to move these cases forward, and let’s see if the TCC will live up to its word and its commitment to this court to mediate.”

Karotkin contested the bondholders’ contention that financing for the PG&E plan would fall apart if the Tubbs Fire claims exceed $6.9 billion, saying there is “ample capacity in both the debt and equity markets to fund the plan and meet the requirements of AB 1054. The debtor’s plan does not vaporize.”

He said Stamer was promoting the misconception that PG&E’s financing must come from the existing equity holders. “It doesn’t. There’s no requirement that it comes from the existing equity holders,” he said.

“The ad hoc bondholders are not a group of altruistic investors willing to put up money on favorable terms in an effort to save the state of California,” Karotkin said. “Any number of financial institutions have advised the debtors that there is adequate capital necessary … and on substantially better terms than the terms that are being provided by the ad hoc bondholders.”

Montali assured Karotkin that PG&E’s plan was still a contender.

“I may have disappointed you because I ended exclusivity, but I didn’t say your plan was out of the running,” Montali said.

“Neither one is perfect yet, and neither one is confirmable yet. But both are potentially confirmable,” he said.

Montali declined to rule on scheduling the confirmation of either restructuring plan. Hearings in the proceeding are slated to continue at least into early next year.

Shutoffs Resume

By Thursday morning, PG&E’s latest round of shutoffs covered nearly 183,000 customers — or about 540,000 people — in the Sierra Foothills and North Bay regions, where a “Diablo” wind event was bringing peak gusts of 65 miles per hour in conditions of extremely low humidity.

“Once the high winds subside, PG&E will inspect the de-energized lines to ensure they were not damaged during the wind event, and then restore power,” the utility said in a statement. “PG&E will safely restore power in stages as quickly as possible, with the goal of restoring the vast majority of customers within 48 hours after the weather has passed.”

PG&E tweeted that customers currently impacted would be restored in advance of any further PSPS initiated this weekend. The company said it forecasts indicated “elevated” risk of additional blackouts on Sunday and Monday.

PG&E’s incited a backlash from California regulators and Gov. Gavin Newsom over its decision to shut power to more than 2 million residents earlier this month.  The company has defended its decision and last week signaled it will continue the PSPS policy for years until it hardens its system against wildfire danger. (See PG&E Says Blackouts Will Continue.)