A compensation fund for California wildfire victims will be worth much less than the $13.5bn originally agreed after modest demand for new shares pushed down the equity value of PG&E, the bankrupt utility whose equipment was deemed responsible for the fires.
The San Francisco company is expected to emerge from bankruptcy in the coming week, after completing an $8bn dollar equity fundraising backed by hedge fund managers David Tepper and Daniel Loeb and other investors. PG&E’s heavy debt burden has left investors debating whether its new financial structure will prove robust in the face of future wildfire costs.
The sale of common stock and convertible stock units was agreed late on Thursday at the equivalent of $9.50 per share, significantly below a theoretical valuation ascribed to the stock earlier in the bankruptcy process.
PG&E — formerly known as Pacific Gas & Electric — filed for bankruptcy in 2019 in order to resolve liabilities related to a series of fires that tore through California in the previous two years. Victims, who numbered 80,000, agreed to be paid compensation through a trust that was to be capitalised with $13.5bn, half in cash and half in stock. At the latest share price, the stock portion is worth approximately $4.4bn, giving the fund a total value only a little higher than $11bn.
“Our predictions that fire victims would get . . . less in stock than the $6.75bn they were promised has come to pass,” said Francis Scarpulla, an attorney for some dissident fire victims. “The idea that the equity hedge funds that control PG&E are walking away with billions of dollars while the fire victims are getting short changed is appalling.”
This week’s fundraising was the last piece in PG&E’s plan to emerge from what has been one of corporate America’s most unusual and complicated bankruptcy reorganisations. Earlier this month, it took advantage of investors’ voracious appetite for corporate debt to raise more than $14bn in bonds and loans at prices well below the borrowing costs it had previously projected.
“The primary purpose of our Chapter 11 filings was to address the billions of dollars in claims from victims of recent wildfires,” said Jason Wells, chief financial officer. “This financing effort takes us one step closer to compensating victims for their losses.”
PG&E’s shares and bonds, as well as insurance claims against the company, all became favourites of hedge fund traders over the past two years, as groups including Elliott Management, Baupost and Abrams Capital Management speculated on how much it would cost to settle with fire victims while leaving intact a restructured utility.
Unusually for a bankrupt company, PG&E’s market capitalisation never fell below $2bn during the Chapter 11 process.
While the PG&E stock could rise over time, it could also sink if the company’s debts become unmanageable. Its new debt load of nearly $40bn will be double its pre-bankruptcy level.
The new PG&E has committed billions of dollars to safety and maintenance, in the hope of redeeming its image as a rogue operator. It also agreed to not pay a dividend for three years while it invests in upgrading its equipment to become safer. On June 16, the company pleaded guilty to 84 counts of involuntary manslaughter related to a fire that tore through Paradise, California, in 2018.
In parallel with the financial restructuring of PG&E, California has also created a $20bn insurance fund for state utilities to fund future claims from wildfires. PG&E will initially contribute $5bn. A key question for many investors is whether the fund will be sufficient for large-scale fires.
“Investors are putting a lot more confidence in the fund than its cash-paying ability,” said Andy DeVries, an analyst at research group, CreditSights, which has been bearish on PG&E’s debt.
Those more sanguine about the prospects for PG&E point to its expected $2bn in annual net income and growth prospects from serving one of the most affluent corridors in the US.
“The bull case is that they’re more insulated from fires than people anticipate,” said one executive at a fund which had been involved at PG&E throughout the bankruptcy.
Additional reporting by Joe Rennison and Derek Brower