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October 9, 2019 – The Court hearing the PG&E Corporation cases has delivered a major setback to the Debtors' hopes of maintaining control over their Chapter 11 cases (and the ultimate widlfire tab they will have to pay), granting a joint motion filed by the Debtors’ Official Committee of Tort Claimants (the “TCC”) and the Ad Hoc Committee of Senior Unsecured Noteholders of Pacific Gas and Electric Company (the “Ad Hoc Committee,” together with TCC, the "Movants") to terminate the Debtors’ existing exclusivity period. With that exclusivity terminated, the Movants have the green light to submit their competing, ready-to-go, Plan to the Debtors' creditors. In his order, and an accompanying order rejecting the Debtors' motion to extend exclusivity [Docket Nos. 4167 and 4168, respectively], Judge Dennis Montali rejected requests to open up the Plan playing field more generally. For now, it is only the Movants who have a right to go head-t-to-head with the Debtors. Judge Montali was also relatively kind to the Debtors' bankruptcy professionals, offering that "In sum, the [Debtors'] plan is on track as well as can be expected for now." Judge Montali predictably gave special attention to the view of groups representing wildfire victims "speaking through the TCC" who have "spoken loudly and clearly that they want their [ie the TCC] and the Senior Noteholders’ proposed plan to be considered."
In addition to underscoring the point that he has made throughout these cases (ie that the interests of widfire victims come first), Judge Montali also seems to have accepted the logic summed up in a recent statement filed by the Debtors' Official Committee of Unsecured Creditors (the “Official Committee”) in support of the Movants. That statement espoused the benefits of a healthy, albeit limited, competition between the Debtors and the Movants, stating that it was happy to let "competitive forces" (ie proponents of competitive Plans) continue to drive the process along, noting that it "does not yet endorse the AHG/TCC Plan at this time…in the belief that the competition may result in the Debtors becoming more transparent and cooperative, and will continue to generate improvements in both plans that serve to increase the likelihood of a successful outcome in these cases." Both the Official Committee and Judge Montali also agree that unlimited competition, ie extending the playing field for further entrants is likely to muddy the waters and slow things down, Judge Montali extolling the virtues of "two well-counselled groups …doubly important in light of the looming deadline for meeting the Wildfire Fund requirements of AB 1054."
The Movants argue that their Plan provides for a more comprehensive settlement of all wildfire claims against the Debtors, including subrogation claims, valued at $24 billion, paid with a mix of cash and equity of the Reorganized PG&E Corp., which both the TCC and the Ad Hoc Committee believe has the best chance to fully and fairly compensate wildfire victims. In addition to its more comprehensive reach, the Movants have argued that their financing is superior, that payments to victims under the Wildfire Claims Settlement and Alternative Plan will be satisfied from, among other sources, fully committed financing provided by the members of the Ad Hoc Committee—in contrast to what they view as "the highly conditional and illusory ‘financing’ that the Debtors hope will materialize to back the Placeholder Plan." See also, "Alternative Plan Term Sheet" below.
On September 23, 2019, the Debtors filed a First Amended Chapter 11 Plan [Docket No. 3966] which amended their first iteration of the Plan filed on September 9th to incorporate a settlement with holders of 85% of their insurance subrogation claims further to which the Debtors agreed an $11.0bn settlement figure for claims relating to the 2017 Northern California wildfires and 2018 Camp Fire. The September 9th Plan included an absolute cap on wildfire liabilities of $17.9bn, comprised of $8.4bn for Wildfire Claims and $8.5bn for subrogation claims, and insisted that "the Plan will not become effective" if those redlines were crossed. In a move that raised a few eyebrows, having just drawn a redline of $8.5bn as to subrogation claims, the Debtors proceeded to bump that number up by $2.5bn just four days later.
The Court's Ruling
The order granting the Movants' motion [Docket No. 4167] stated, “The court has carefully considered the arguments of the Movants, the Debtors, the PG&E Shareholders, and other parties opposing and joining the motion. The Court recognizes that the Debtors have made significant progress in these cases. Their proposed plan reflects successful resolution of major issues, including settlement with a substantial group of public entity creditors and a tentative settlement with one of the major constituencies, the Ad Hoc Group of Subrogation Claim Holders. Further, some of their opponents’ arguments that Debtors’ plan is not feasible because of uncertain financing conditions have been adequately addressed at this point. In sum, the plan is on track as well as can be expected for now.
The parties most deserving of consideration, speaking through the TCC, have changed their position from the last time the court considered terminating exclusivity, and spoken loudly and clearly that they want their and the Senior Noteholders’ proposed plan to be considered. Debtors’ contentions that their opponents’ proposed plan is flawed and will not be confirmable are no reason to deny the motion. As proposed, Movants’ proposed plan is also on track as well as can be expected for now. The coming weeks will permit ample time to explore and resolve issues regarding both plans consistent with the more traditional plan vetting processes well-known by bankruptcy professionals.
While the court has expressed concerns about avoiding any type of litigation that deals with corporate control and sophisticated and rarified bankruptcy issues at the expense of paying the wildfire victims, it will not second-guess the informed decision of two well-counselled groups who are willing to take the attendant risks that go with competing plan disputes. This is doubly important in light of the looming deadline for meeting the Wildfire Fund requirements of AB 1054. The risk that Debtors’ plan will not be confirmable for some reason is not worth turning away a viable alternative. A dual track plan course going forward may facilitate negotiations for a global resolution and narrow the issues which are in legitimate dispute. If that result is not achieved and the estimation process is completed on schedule in the district court, the outcome might result in one plan failing because it pays too much to the victims, or the other failing because it does not. One plan emerging as confirmable is a very acceptable outcome. And if both plans pass muster, the voters will make their choice or leave the court with the task of picking one of them.”
On September 25, 2019, the Debtors filed a motion to extend the periods during which the Company has an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including November 29, 2019 and January 28, 2020, respectively [Docket No. 4005]. Absent the requested relief, the Plan filing date expired on September 26, 2019 and solicitation date is scheduled to expire on November 26, 2019. The Debtors have of course already filed a Plan (on September 9th) but our anxious to maintain exclusive possession of the playing field as long as possible against vigorous challenges posed by a number of stakeholders that already have alternative Plans drafted and ready to go. One of those Plans has been proposed by the TCC and the AHG which back up the Plan with what they claim is a $24.0bn package of cash and equity.
The Debtors' requesting motion makes an understated reference to these Plans, in noting "Although the exclusive period to file a chapter 11 plan under section 1121 of the Bankruptcy Code remains in effect, out of an abundance of caution, the Debtors are seeking a further extension of the Exclusive Periods as they continue to prosecute their Plan. The Debtors, of course, are aware of the pending motion filed by the Ad Hoc Committee of Senior Unsecured Noteholders of the Utility and the TCC to terminate exclusivity. This Motion is not intended to circumvent that pending motion and the Debtors will respond separately to such motion."
Rarely has Plan exclusivity received such attention. The question will be whether they can add a third major settlement to their arguments to maintain exclusivity before then and, if not, whether the Court can be persuaded by the $1.0bn settlement with 18 "Public Entities" and the $11.0bn settlement with holders of subrogation claims. As they know well, the claimants that really matter to Judge Montali are those with whom they have not yet settled, individual victims of the California wildfires.
On September 19, 2019, the TCC and the AHG filed a motion to terminate the Debtors’ Exclusivity Period [Docket No. 3940], the second attempt by these stakeholders to terminate the Debtors' exclusivity periods and get their own Plan in front of creditors. This motion to terminate followed rapidly on the heels of the Debtors much derided September 9th Plan [Docket No. 3841], now somewhat beefed up in a First Amended Plan [Docket No. 3966] which reflects the Debtors' September 13th settlement with holders of 85% of their insurance subrogation claims further to which the Debtors have agreed an $11.0bn settlement for claims relating to the 2017 Northern California wildfires and 2018 Camp Fire.
On August 16, 2019, the Court narrowly rejected motions urging that exclusivity be terminated and allowing the Debtors to maintain control for now. In summing up his approach (and modest change of heart, as he had himself actively encouraged the preparation of alternative Plans), Judge Montali stated, "At the present time there is no purpose in engaging in such an exercise [ie proceeding with multiple, competing Plans]. The Debtors have placed before all a proposal that, if coaxed and guided to maturity should result in a proper outcome for all creditors without needing to deal with all of these other issues."
That, however, was before the Debtors filed their first stab at a Plan just in advance of a September 9th, deadline agreed with the Court. That Plan, largely derided as a "placeholder" Plan when something truly substantive was expected; and roundly criticized for its lowball (nominally take-it-or-leave-it) $17.9bn Plan, has now given Plan antagonists the ammunition they need to get Judge Montali to open up the Plan playing field to competing Plans.
The current extension motion explains, “The Debtors have made substantial progress in the Plan process. As stated, and as the Court is aware, the Debtors have achieved two critical settlements of their wildfire liabilities to be satisfied and discharged pursuant to their Plan. The first settlement fully resolves all of the wildfire claims held by the 18 settling Public Entities for the aggregate amount of $1 billion. The second settlement fully resolves all of the claims held by Subrogation Claimants in the asserted amount of approximately $20 billion for consideration in the amount of $11 billion, representing a 45% reduction. Moreover, the Debtors filed their Plan on September 23, 2019. The Plan encompasses the two settlements discussed above and also is backed by equity commitments of at least $14 billion, which serve as the foundation for the equity portion of a comprehensive financing package that will fund the Plan and the Debtors’ timely emergence from chapter 11. With the CPUC review process also underway, the Debtors’ Plan is on track to meet the June 30, 2020 deadline imposed by AB 1054.
Nevertheless, as the Court has recognized, certain contingencies still exist that warrant the requested extensions. These include getting more clarity on the magnitude of the wildfire liabilities held by the constituency represented by the TCC to be addressed in the Plan. This is the subject of ongoing proceedings before the United States District Court, the California Superior State Court, as well as this Court. There are also certain other preliminary Plan-related issues raised by the Court, including whether wildfire claims asserted by certain public or private entities are subject to estimation, and post-petition interest rate and make-whole issues related to funded debt claims and their proposed treatment under the Plan. In light of these issues and contingences, the Court has appropriately recognized that filing a proposed Disclosure Statement with respect to the Debtors’ Plan is still premature."
Alternative Plan Term Sheet
According to the Alternative Plan Term Sheet: “The Plan shall provide for:
- $28.4 billion in new money investments in exchange for common stock of Reorganized PG&E Corp. (representing approximately 58.8% of the outstanding common stock of Reorganized PG&E Corp. on a fully diluted basis), new debt of Reorganized PG&E Corp. and new debt of the Reorganized Utility, in each case as described herein;
- The proceeds of the new money investments shall be used to (a) pay in full outstanding DIP Financing Facility Claims (as defined below), (b) pay in full all Utility bond, term loan and revolving debt maturing prior to December 31, 2022, (c) fund the creation of a trust (the 'Fire Claims Trust') for the purpose of paying fire claims related to those Northern California fires listed in Schedule 1 attached hereto, equal to $24 billion in cash and shares of common stock of Reorganized PG&E Corp. (representing approximately 39.5% of the outstanding common stock of Reorganized PG&E Corp. on a fully diluted basis) issued to the Fire Claims Trust and certain other fire consideration as set forth herein ('Aggregate Fire Consideration') and (d) fund the Debtors’ contribution of $5.0 billion, which amount consists of both the Debtors’ initial and first annual contributions, to the long-term California statewide wildfire fund created for purposes of paying future utility-related wildfires in California (the 'Wildfire Fund');
- Reinstatement in full of the Long-Term Utility Unsecured Notes; and
- Payment of all trade claims in the ordinary course of business and assumption and/or continuation of pension-related obligations.”
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