January 29, 2019 – PG&E Corporation (“PG&E,” NYSE: PCG) and its primary operating subsidiary, Pacific Gas and Electric Company (“Utility” and together with PG&E, the “Debtors” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of California, lead case number 19-30088 [Docket No. 1]. PG&E is a holding company headquartered in San Francisco. It is the parent company of Utility, an energy company that serves 16 million Californians across a 70,000-square-mile service area in Northern and Central California.
The Company is represented by Tobias S. Keller of Keller & Benvenutti. Further board-authorized engagements include (i) Weil, Gotshal & Manges and Cravath, Swaine & Moore as the Company’s legal counsel, (ii) Lazard as its investment banker and (iii) AlixPartners as restructuring advisor. In addition, the Company has announced the appointment of two AlixPartners Managing Directors to assist with the reorganization process; James A. Mesterharm, will serve as Chief Restructuring Officer and John Boken will serve as Deputy Chief Restructuring Officer.
The Company’s petition notes between 50,000 and 100,000 creditors; estimated assets of $71.4bn; and estimated liabilities of $51.7bn.
January 14, 2019 Announcement on “Extraordinary Challenges”
On January 14, 2019, the Company filed a statement with the SEC noting that it intended, following the expiration of a 15-day advance notice period mandated under California law, to file for Chapter 11 protection.
In that 8-K, the Company stated: “PG&E Corporation (the ‘Corporation’) and its regulated utility subsidiary, Pacific Gas and Electric Company (the ‘Utility’), are facing extraordinary challenges relating to a series of catastrophic wildfires that occurred in Northern California in 2017 and 2018. Following a comprehensive review with the assistance of outside advisors, the boards of directors of the Corporation and the Utility have determined that commencing reorganization cases under Chapter 11 of the U.S. Bankruptcy Code (‘Chapter 11’) is appropriate, necessary and in the best interests of all stakeholders, including wildfire claimants, PG&E’s other creditors and shareholders, and is ultimately the only viable option to restore PG&E’s financial stability to fund ongoing operations and provide safe service to customers. The Corporation and the Utility currently expect that they will file for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Northern District of California on or about January 29, 2019, following the expiration of a 15-day advance notice period mandated under recently enacted California law.”
Potential Wildfire Liability
The January 14, 2019 8-K detailed the extraordinary potential liability facing the Company as a result of the 2017 and 2018 Northern California wildfires, estimating that total liability could extend past $30bn (based on Company statements, this would exclude the Tubbs fire…see below), with that figure not taking into account potential punitive damages, fines and penalties or damages related to future claims – factors that could see that $30bn exposure soar further.
The 8-K notes, “If the Utility’s facilities, such as its electric distribution and transmission lines, are determined to be the substantial cause of one or more fires, and the doctrine of inverse condemnation applies, the Utility could be liable for property damage, business interruption, interest and attorneys’ fees without having been found negligent.”
“In addition to claims for property damage, business interruption, interest and attorneys’ fees, the Utility could be liable for fire suppression costs, evacuation costs, medical expenses, personal injury damages, punitive damages and other damages under other theories of liability, including if the Utility were found to have been negligent….Further, the Utility could be subject to material fines or penalties if the California Public Utilities Commission (the ‘CPUC’) or any law enforcement agency brought an enforcement action, including a criminal proceeding, and determined that the Utility failed to comply with applicable laws and regulations….As of January 11, 2019, PG&E is aware of approximately 50 complaints on behalf of at least 2,000 plaintiffs related to the Camp Fire, six of which seek to be certified as class actions….As of January 11, 2019, PG&E is aware of approximately 700 complaints on behalf of at least 3,600 plaintiffs related to the 2017 Northern California wildfires, five of which seek to be certified as class actions,” the Company notes.
Looking at the potential liabilities, the Company cites a news release issued on December 12, 2018 by the California Department of Insurance, which gave an update on potential losses in connection with the 2017 and 2018 Northern California Wildfires.
The dollar amounts announced by the California Department of Insurance represent an aggregate amount of approximately $17bn of insurance claims made as of the above dates related to the 2017 and 2018 Northern California wildfires. PG&E said it expects that additional claims have been submitted and will continue to be submitted to insurers, particularly with respect to the Camp Fire.
“These claims reflect insured property losses only. The $17 billion of insurance claims made as of the above dates does not account for uninsured or underinsured property losses, interest, attorneys’ fees, fire suppression and clean-up costs, evacuation costs, personal injury or wrongful death damages, medical expenses or other costs, such as potential punitive damages, fines or penalties, or losses related to future claims, each of which could be significant. The scope of all claims related to the 2017 and 2018 Northern California wildfires is not known at this time because of the applicable statutes of limitations under California law,” the Company says.
If PG&E were to be found liable for certain or all of the costs, expenses and other losses described above with respect to the 2017 and 2018 Northern California wildfires, the Company says the amount of such liability could exceed $30bn, which does not include potential punitive damages, fines and penalties or damages related to future claims. “This estimate is not intended to provide an upper end of the range of potential liability arising from the 2017 and 2018 Northern California wildfires, which management is not able to reasonably determine at this time. In certain circumstances, PG&E’s liability could be substantially greater than such amount,” the Company says.
In a press release
announcing the Chapter 11 filing, PG&E noted that, “In conjunction with the filings, PG&E also filed a motion seeking interim and final approval of the Court to enter into an agreement for $5.5 billion in debtor-in-possession (‘DIP’) financing with J.P. Morgan, Bank of America, Barclays, Citi, BNP Paribas, Credit Suisse, Goldman Sachs, MUFG Union Bank and Wells Fargo acting as joint lead arrangers. PG&E expects the Court to act on an interim basis on the DIP motion in the coming days. The DIP financing, when approved, will provide PG&E with necessary capital to ensure essential maintenance and continued investments in safety and reliability for the expected duration of the Chapter 11 cases. On January 21, 2019, the Debtors filed an 8-K with the SEC
detailing the terms of a DIP commitment letter and on January 23, 2019 they further filed a copy of a lender presentation
in respect of the DIP financing.
The Debtors’ motion [Docket No. 24] seeking approval of the $5.5bn DIP facilities ($1.5bn on an interim basis) provides the following detail:
- DIP Facilities: The DIP Facilities provide for (a) a first lien superpriority revolving credit facility in an aggregate principal amount of $3.5bn, which includes a $1.5bn letter of credit sub-facility, (b) first lien superpriority term loans in an aggregate principal amount of $1.5bn and (c) first lien superpriority delayed draw term loans in an aggregate principal amount of $500mn
- Borrower: Pacific Gas and Electric Company
- Guarantors: PG&E Corporation, together with any of its subsidiaries (other than the Borrowers) that subsequently become party to the DIP Credit Agreement
- DIP Lenders: Currently, JPMorgan Chase Bank, N.A., Bank of America, N.A., Barclays Bank PLC, Citibank, N.A., BNP Paribas, Credit Suisse AG, Goldman Sachs Bank USA, MUFG Union Bank, N.A. and Wells Fargo Bank, National Association, also serve as issuing lenders under the DIP L/C Sub-Facility
- DIP Agents: JPMorgan Chase Bank, N.A. is the administrative agent. Citibank, N.A. is the collateral agent
- Lead Arrangers and Bookrunners: J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Citibank, N.A., BNP Paribas Securities Corp., Credit Suisse Loan Funding LLC, Goldman Sachs Bank USA, MUFG Union Bank, N.A. and Wells Fargo Securities, LLC
- Use of DIP Proceeds: The DIP Facilities proceeds shall be used (i) for working capital and general corporate purposes and (ii) to pay fees, costs and expenses incurred in connection with DIP Facilities and professional and other fees and costs of administration incurred in connection with the Chapter 11 cases
- Interest Rates:
- DIP Revolving Loans – shall accrue interest at L+225 bps per annum.
- DIP Term Loans and DIP Delayed Draw Term Loans – shall accrue interest at L+250 bps per annum.
- Default Interest – additional 2% per annum.
- DIP Revolving Credit Facility Unused Fees: 0.375% per annum for undrawn availability under the Revolving Credit Facility.
- DIP Delayed Draw Term Loan Facility Unused Fees: (a) from (and including) the Allocation Date to (and including) the date that is 180 days after the Allocation Date, 1.25% per annum, and (b) from (and including) the date that is 181 days after the Allocation Date to (and including) the last day of the Delayed Draw Commitment Period, 2.50% per annum, in each case for undrawn Delayed Draw Term Loans.
- L/C Fronting Fee: 0.125% per annum payable to the applicable Issuing Lender on the outstanding face amount of each letter of credit.
- L/C Participation Fee: 2.25% per annum on the outstanding face amount of each letter of credit.
- Extension Fee: 0.25% (12 month extension).
- Maturity Date: December 31, 2020
The Power is On
In a letter to customers
, PG&E stated, “The power and gas will stay on: We will continue to provide you with reliable electric and natural gas service, and that will not change as a result of this process. To be very clear, we are not “going out of business,” and there will be no disruption in the services you expect from us.”
In recent days there has been speculation that the finding of CAL FIRE, that PG&E equipment had not been the source of the Tubbs fire, might change the Company’s trajectory towards Chapter 11 and/or change the Company’s liability estimates. In its press release, the Company makes it clear that responsibility for the Tubbs fire was not part of its calculation as to whether to seek Chapter 11 protection, ie that it had already factored in its belief that it would not be found liable for that fire. The press release states, “On January 24, 2019, CAL FIRE released the results of its investigation of the 2017 Tubbs Fire, which concluded that PG&E equipment did not cause the fire. The comprehensive analysis underlying PG&E’s decision to pursue reorganization under Chapter 11, conducted with the assistance of independent legal and financial advisors, took into account PG&E’s longstanding belief based on available evidence that its equipment did not cause the Tubbs Fire.”
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