PG&E Corporation – Objects to Noteholders Request to Terminate Exclusivity, Accuses Noteholders of Attempt to Hijack Chapter 11 Process Through Creation of Impaired Class

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July 18, 2019 – The Debtors objected to a motion filed by the Ad Hoc Committee (defined below) to terminate the Debtors’ exclusive Plan filing and solicitation periods (the “Termination Motion”) [Docket No. 3075] and pushed back on a term sheet for an alternative Plan proposed by the Ad Hoc Committee as "an attempt to hijack the chapter 11 plan process." The objection further characterizes the Ad Hoc's motion as part of efforts to "both improve and secure their position to the detriment of other stakeholders" when in fact the Ad Hoc Committee's notes are not even impaired. Normally, efforts to put an end to a debtor's exclusivity periods this early in cases of this size would seem almost laughable; but when a motion is filed by a group holding "the lion's share" of $15.8bn of pre-petition notes, somehow that changes. The Court scheduled a hearing to consider the matter for July 23rd, so we shall soon understand further what strategic advantage the Ad Hoc Committee will be able to exert on the Debtors' cases.

The objection states, “The Termination Motion seeks an immediate, unprecedented termination of the Exclusive Periods less than six months after the commencement of one of the largest and most complex chapter 11 cases in U.S. history.

In fact, despite their short duration, the Debtors have made substantial progress in the administration of the Chapter 11 Cases and towards the formulation of a viable and confirmable plan of reorganization. This includes:

  • Stabilizing business operations, including restoring trade credit, and thereby substantially enhancing the Debtors’ liquidity profile;
  • Virtually eliminating demands for cash collateral and other forms of credit enhancement that were rampant at the inception of these cases and presented a significant liquidity challenge;
  • Achieving a key settlement with the Public Entities resolving all of their wildfire claims for an aggregate amount of $1 billion;
  • Creating a $105 million fund to address the housing needs of those displaced by the wildfires;
  • Hiring a new Chief Executive Officer with significant utility experience and a well-documented safety record;
  • Installing new senior leadership in both the Debtors’ electric and gas businesses;
  • Refreshing the Debtors’ Board of Directors with 12 of 14 new members with substantial safety, utility, and restructuring experience;
  • Engaging in ongoing negotiations and discussions with the other two wildfire claimants’ constituencies in an effort to achieve a consensual resolution of their claims to be embodied in a chapter 11 plan; and
  • Engaging in regular weekly meetings with the CPUC to assure that all issues within the jurisdiction and authority of the CPUC are timely and comprehensively addressed in the context of a chapter 11 plan.

These efforts, together with the recently enacted legislation, which the Governor has noted is just the first step in the legislative process to address the issues facing the Debtors, now enable the Debtors to continue moving forward with the chapter 11 plan process in a rational manner that will ensure achieving the June 30, 2020 date for emergence from chapter 11 that is a condition to the Debtors’ participation in the recently enacted go-forward wildfire fund, and will optimize the opportunity to achieve a consensual plan.”

As to the Termination Motion itself, the objection continues, "In an attempt to hijack the chapter 11 plan process and undermine Congressional intent in enacting section 1121 of the Bankruptcy Code, the Ad Hoc Committee annexed to its Termination Motion a purported ‘Term Sheet for Plan of Reorganization (the ‘Ad Hoc Term Sheet,’ and the plan described therein, the ‘Ad Hoc Plan’)….Recognizing the obvious infirmities of the Ad Hoc Plan, yesterday, more than three weeks after the Termination Motion was filed and on the eve of the Objection Deadline, the Ad Hoc Committee filed a 91-page submission with the Court, including an Amended Plan Term Sheet (the ‘Amended Ad Hoc Term Sheet’), in a futile, eleventh hour attempt to salvage its so-called plan (the ‘Amended Ad Hoc Plan’). The new filing, however, does not change the inescapable conclusion that, as is the case with the original Ad Hoc Plan, the plan reflected in the Amended Ad Hoc Term Sheet also is not a credible way to move these cases forward to a successful conclusion. 

Even a cursory review of the Amended Ad Hoc Term Sheet plainly shows that not only is the Amended Ad Hoc Plan incomplete and lacking credibility, it is unconfirmable on its face….The Amended Ad Hoc Term Sheet’s treatment of the class of prepetition unsecured notes held by the Ad Hoc Committee violates the good faith requirement of section 1129(a)(3) of the Bankruptcy Code and the absolute priority rule. The Amended Ad Hoc Term Sheet manufactures impairment of the class of claims held by the members of the Ad Hoc Committee in an attempt to ‘create’ an impaired accepting class and, more importantly, to enhance their position….Though classifying the class as ‘impaired,’ the Amended Ad Hoc Term Sheet itself nevertheless reflects a ‘98-99% recovery on these claims. As demonstrated in the Perry Declaration, however, this treatment actually delivers more than a 100% recovery in violation of the absolute priority rule….Moreover, the motivation of the Ad Hoc Committee is abundantly clear – although a simple reinstatement and unimpairment of the notes would be more economically beneficial to the reorganized Debtors, that approach would not enable the Ad Hoc Committee to both improve and secure their position to the detriment of other stakeholders, and to create the impaired accepting class necessary for the Amended Ad Hoc Plan to be confirmable under section 1129.

The Termination Motion

On June 25, 2019, an ad hoc committee comprised of certain of the Debtors' senior unsecured noteholders (the “Ad Hoc Committee”) 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 follwing 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-realated 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.”

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