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August 16, 2019 – The Court hearing the PG&E cases has rejected a pair of motions from key stakeholder groups (ie, the “Ad Hoc Committee of Senior Unsecured Noteholders” and the "Ad Hoc Group of Subrogation Claim Holders") that requested termination of the Debtors' exclusive right to file a Chapter 11 Plan [Docket Nos. 3569 and 3570, respectively].
The surprise here is perhaps not that the Debtors have kept control over the Chapter 11 process ("at least for a time") but how close a call this actually was. One would expect an enormous and complicated bankruptcy to have a pro forma path through several exclusivity extensions, at least, but that was not the case here. Clearly the Court was tempted to open up the playing field to competing Plans, as it had in PG&E's 2001 bankruptcy, and has given solace to the challenging stakeholder groups. The carefully worded memorandum explaining the orders [Docket No. 3568] will serve as a reminder to the Debtors that they must move forward quickly and that they must focus on the "number one priority and goal" of "compensation for the fire victims who are involuntary creditors of these debtors." With his orders, Judge Montali has sent the message that the issue of "who" has control over the Plan is less important to him than "what" that Plan contains. If the message is correct, he is willing to leave that message in the hands of the most expedient messenger; for now, if it heeds the Court's guidance, PG&E. In summing up his approach, Montali states, "At the present time there is no purpose in engaging in such an exercise. 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."
In parting words for the challenging stakeholders' professionals, whom he had encouraged to develop alternative Plans and undoubtedly leaving Court subdued that revenue streams had not just been opened to full throttle, Montali offered words of encouragement that will also have been noted by the Debtors' own professionals: "Thanks to the Ad Hoc Committee of Senior Unsecured Noteholders and to the Ad Hoc Group of Subrogation Claim Holders for their enormous efforts and contributions, the court has decided to exercise its discretion and leave those efforts unfulfilled while the Debtors proceed with theirs." For now.
In the memorandum detailing his reasons for rejecting the pair of motions, Judge Montali stated: "When the Motions were filed, perhaps even before that when the court first considered extending exclusivity, it seemed likely that it would be terminated for a variety of reasons, not the least of which is that this court did exactly that in the previous Pacific Gas and Electric Company bankruptcy and has done it on other occasions with other debtors.
Further, comments from many parties as well as the California Public Utilities Commission and the Governor’s office were that competition is best facilitated with the termination of exclusivity. More important to the court, the parties, the fire victims, and all other concerned citizens of Northern California, is to find a clear path to reach the goal of compensation for the fire victims who are involuntary creditors of these debtors as well as for the contractual claims of their voluntary creditors.
On further reflection, not only because of the exigencies of these cases but because of the statutory presumption in favor of debtors’ exclusivity (at least for a time), coupled with the prospective timetable now laid out in Debtors’ Supplement Statement, persuades the court that the best choice is to leave the Debtors’ exclusivity in place for them to proceed with their proposed resolution.
The two competing plans reflected in the Motions and the outline of theirs by the Debtors all involve what looms on the horizon as a complicated process to estimate the enormous amount of money that must be dedicated to the compensation of the fire victims and their insurers as a matter of fairness, compliance with the Bankruptcy Code’s order of priorities, and the mandate of recent California legislation, AB 1054.
Competing plans are tempting, and no doubt produce a feast for lawyers, accountants, investment bankers and others, not to mention the intellectual challenges to the court. But the inescapable fact is that the fire victims and their insurers should not need to wait for conclusion of expensive, lengthy and uncertain disputes that only indirectly concern them. Bankruptcy issues such as the absolute priority rule, cramdown of equity, super priorities and impairment. are all exciting challenges for bankruptcy practitioners but they have little or nothing to do with compensating victims of enormous and unimaginable tragedies. If there were no victims to attend to, then perhaps the battles that would be fought would be the bankruptcy equivalent of a proxy fight or a hostile takeover. That outcome, however, is of no benefit to the victims and is antithetical to the court’s and other parties’ repeated stated goal of compensating the victims.
At the start of the hearing on August 14th, the court restated that number one priority and goal. Proponents of the two competing plans and those in favor of opening the door to even more competition reminded the court of its ‘credible and confirmable’ standard for consideration of termination of exclusivity. The Ad Hoc Committee of Senior Unsecured Noteholders and the Ad Hoc Group of Subrogation Claim Holders have both met those standards. The court has no doubt that their hard bargaining would result in refinement if not resolution of some of the contests described above That the outcome might have produced competing accepted and confirmed plans, resulting in U.S.C. § 1129(c)’s rarely invoked court consideration of the preferences of creditors and equity security holders in determining which plan to confirm.
At the present time there is no purpose in engaging in such an exercise. 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.
For all the foregoing reasons, and with thanks to the Ad Hoc Committee of Senior Unsecured Noteholders and to the Ad Hoc Group of Subrogation Claim Holders for their enormous efforts and contributions, the court has decided to exercise its discretion and leave those efforts unfulfilled while the Debtors proceed with theirs. That is the best of the choices presented."
Background on the Objections
The Ad Hoc Committee of Senior Unsecured Noteholders Motion
On June 25, 2019, the Ad Hoc Committee of Senior Unsecured Noteholders filed a motion seeking termination of the Debtor's exclusive Plan filing and solicitation periods, which currently extends through September 26, 2019 and November 26, 2019, respectively [Docket No. 2741]. The motion assails the Debtors for lack of progress as they enter another wildfire season and proposes a $30.0bn alternative which is comprised of the following key elements:
- Up to $30.0bn in new money investments in exchange for common stock of Reorganized PG&E Corp., new debt of Reorganized PG&E Corp. and new debt of the reorganized Utility
- The proceeds of the new money investments shall be used to (a) pay in full outstanding DIP Financing Facility Claims, (b) pay in full all Utility bond, term loan and revolving debt maturing prior to December 31, 2022, (c) fund the reation of a trust for the purpose of paying wildfire claims and (d) fund the Debtors' contribution of $4bn to a long-term California statewide wildfire fund for purposes of paying future utility-related wildfires in California
- Distribution of Long-Term Utility Replacement Notes to holders of the Utility notes maturing on January 1, 2013 or later, and
- Payment of all trade claims in the ordinary course of business and assumption and/or continuation of pension-related obligations.
The motion states, “The Ad Hoc Committee files this Motion to terminate the Exclusive Periods so that it may file and pursue confirmation of a plan of reorganization that it believes will allow the Debtors to emerge successfully from chapter 11 by the end of 2019 or shortly thereafter, well in advance of the 2020 California wildfire season. The need to exit bankruptcy expeditiously is paramount. It has been five months since the Petition Date, and a new wildfire season has already begun. Yet the Debtors have proposed no plan—either publicly or in any communications with the Ad Hoc Committee—to protect critical stakeholders, including customers and other residents in its service territory, employees and creditors. Progress towards a viable, confirmable plan is long overdue. The stakes have recently become substantially higher for the Debtors and all other stakeholders following the unveiling of the Governor's wildfire legislative package (the ‘Proposed Wildfire Safety Legislation’) that will require the Debtors to exit bankruptcy by June 30, 2020 in order to access a proposed wildfire recovery fund (the ‘Wildfire Recovery Fund’)
Despite the obvious urgency, the Debtors have wasted crucial time needlessly overhauling its board of directors to protect and entrench the parochial interests of an aggressive new subset of equity holders. The valuable time spent resolving these internal disputes and then educating new directors—the majority of whom have little or no utility and safety experience—has come at the expense of making critical progress towards a successful and swift exit from Chapter 11. And worse, the composition of the reconstituted board raises critical plan process concerns regarding the Debtors' ability to prioritize a rapid and equitable exit from these cases above the economic interests of equity holders. This also has meaningful consequences for the appropriate oversight and governance of the company after it emerges from chapter 11 and its ability to meet the safety requirements of the Proposed Wildfire Safety Legislation. This is absolutely critical for PG&E to be able to provide safe, reliable, clean utility services to its customers in an affordable manner, which is after all its core mission.
No one can dispute that exiting these cases hinges on two critical steps. First, substantial new capital must be infused into the company to (i) resolve fairly and pay the Debtors' current wildfire liabilities, (ii) address the Debtors' potential future wildfire liabilities, (iii) fund the Debtors' implementation of substantial safety measures and ‘harden’ their electrical grid and equipment in order to reduce the occurrence of future wildfires, and (iv) to recapitalize the Utility's balance sheet in-line with its regulatory construct. Second, consensus must be built among a diverse set of stakeholders around a confirmable plan construct. As set forth in more detail below, the Ad Hoc Committee has made progress in taking those steps. The Ad Hoc Committee is willing to fund the reorganized company with fresh equity, which will restore strong investment grade credit metrics so PG&E can once again access low cost capital going forward for all of its necessary long-term infrastructure investments. This is in stark contrast to relying on broad securitization or other financial engineering and off balance sheet debt that we believe the Debtors and equity holders are contemplating. By providing a framework to resolve the diverse interests of the numerous stakeholder constituencies, the Ad Hoc Committee's Term Sheet reflects compromises that would ensure PG&E's long-term viability without ratepayers shouldering the costs of the restructuring—another requirement under the Governor's Proposed Wildfire Safety Legislation for participation in the Wildfire Recovery Fund.
In contrast, the Debtors have offered nothing that is viable to move these cases forward. While the Ad Hoc Committee is an obvious source of the fresh capital needed to exit bankruptcy, the Debtors have not approached the members of the Ad Hoc Committee about providing funding—even though the members of the Ad Hoc Committee have made it clear that they are willing to provide such capital. Nor have the Debtors sought to commence discussions with the Ad Hoc Committee regarding a plan of reorganization. Whatever their reasons for failing to engage with one of their largest creditor constituencies, the Debtors' sluggish pace endangers all stakeholders. In short, the Term Sheet provides a viable, comprehensive and credible solution that will allow the Debtors to emerge from bankruptcy quickly, maintain an investment-grade credit rating in the future and meet the requirements of the Proposed Wildfire Safety Legislation. The plan of reorganization embodied in the Term Sheet is advantageous to virtually every key stakeholder in these chapter 11 cases.”
The Ad Hoc Group of Subrogation Claim Holders Motion
On July 23, 2019, accepting an invitation by the Court to file an alternative Plan, the Ad Hoc Group of Subrogation Claim Holders filed a term sheet in respect of an alternative Plan; and, in order to file that Plan, filed a motion to "immediately" terminate the Debtors’ exclusive Plan filing and solicitation periods [Docket No. 3147]. “Subrogation Claims” are wildfire claims arising from subrogation, assignment, or otherwise in connection with payments made (or to be made) by an insurer to insured wildfire victims. The Ad Hoc Subrogation Group asserts that holders of Subrogation Claims have reported $18.5bn of payments and policy reserves to the California Department of Insurance.
The motion states, “At the May 22 hearing on the Debtors’ motion to extend the Exclusive Periods, the Court invited parties that were committed to advancing these chapter 11 cases to submit proposed plans of reorganization. Specifically, the Court said, ‘[t]he door is half open to the ad hoc committee, the tort claimant committee, or any other party who believes there’s a way to come up with a credible, potentially confirmable plan, other than what the debtors’ counsel may have.’
Since that hearing, the Ad Hoc Subrogation Group has worked tirelessly to present the Court with a credible, confirmable plan (the ‘Subrogation Plan’), the key terms of which are reflected in the term sheet attached hereto as Exhibit A. In light of the Subrogation Plan’s numerous benefits discussed below, and the inability of the Debtors to effectively use the Exclusive Periods to build consensus around a plan structure, the Ad Hoc Subrogation Group submits that the Debtors’ Exclusive Periods should be terminated immediately in order to enable the Ad Hoc Subrogation Group to file the Subrogation Plan.
The Subrogation Plan not only incorporates a reasonable settlement of the total value of all Subrogation Claims, but also preserves the ability of individual fire victims to assert their claims against a well-funded trust and realize a full recovery on their claims. Admittedly, the major open issue in the Subrogation Plan is the total funding required for the individual fire victims’ trust, which will be resolved following further negotiations, or (only if necessary) a targeted estimation process that will address only the individual Wildfire Claims.
Customer safety is a paramount concern for members of the Ad Hoc Subrogation Group. The Subrogation Plan term sheet includes specific provisions to ensure wildfire prevention and mitigation are a top priority for the reorganized PG&E. A majority of the directors will be appointed to help safeguard that appropriate investments are made in upgrades to PG&E’s transmission system, forest management and other efforts to reduce the risk and severity of future wildfires. In summary, the Subrogation Plan also:
- Provides for payment of Individual Wildfire Claims from a well-funded settlement trust;
- Includes an expedited and efficient claim process for individuals to be paid based either on individual claim settlements with the trust or contingent upon proving their claims, to enable the individual wildfire victims to rebuild and move forward in their recovery;
- Resolves Wildfire Subrogation Claims at an amount significantly less than full recovery to help expedite the bankruptcy proceedings;
- Converts a significant portion of all Wildfire Subrogation Claims into equity to strengthen the reorganized Debtors’ balance sheet and reduce the amount of new money (and substantial related costs) necessary for the Debtors to exit chapter 11;
- Creates a strong balance sheet for the reorganized Debtors that allows the company to maintain an investment grade rating and positions the reorganized utility to (a) maintain compliance with state renewable energy standards, and (b) invest in requisite grid improvement and safety enhancement initiatives;
- Maintains rate neutrality for all of the Debtors’ customers;
- Contributes approximately $5 billion to the proposed wildfire recovery fund for future wildfire claims;
- Strengthens and extends the relationship with the reorganized Debtors’ active workforce;
- Assumes the Debtors’ current retirement plan; and
- Allocates more value to existing equity holders than any other option presently on file.”
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