The Chapter 11 bankruptcy reorganization plan submitted a week ago by PG&E Corp. (NYSE: PCG) appeared to have moved the company along a path to retaining some shareholder value and paying off some of the company’s massive debts. Shares popped 20% the day the plan was submitted.
The stock gave all that gain back in Monday’s premarket session following Friday’s late afternoon announcement that California Governor Gavin Newsom has rejected the company’s new plan because “the Amended Plan and the restructuring transactions do not result in a reorganized company positioned to provide safe, reliable, and affordable service to its customers.” For too long, Newsom wrote, “PG&E has simply violated the public trust.”
The governor’s approval is not required by the legislation, known as Assembly Bill (AB) 1054, but, the Los Angeles Times reported, the company did ask Newsom for his opinion of the $13.5 billion settlement the company reached with victims. Now, PG&E has until Tuesday, December 17, to revise its proposal.
The company was banking on Newsom caving in. Rejecting PG&E’s plan threatens to delay the bankruptcy proceedings and, perhaps worse for Newsom politically, the rejection could delay payments to victims, some of whom have been waiting for two years or more for compensation.
By not caving in, and by spelling out what remains for PG&E to do to get his approval, Newsom is taking a big chance. PG&E’s new plan matched the victim compensation amount of a competing plan from an ad hoc group of bondholders and allows the company that emerges from bankruptcy protection to issue new stock to existing shareholders.
Newsom’s letter listed four areas where the company failed to meet the requirements of AB 1054: how the company will elect a “more qualified and independent board of directors”; specific operational and safety metrics for which PG&E will be held accountable; an “escalating enforcement process” if the company fails to meet the metrics; and protections for the state if the company fails to meet its agreed metrics “or commits other bad acts including a subsequent bankruptcy filing.”
The precariousness of the surviving company’s capital structure is the fifth element Newsom discussed:
Based on the financial information provided by PG&E, the reorganized company would not compare favorable to its peers on critical financial metrics. The Amended Plan also leaves the company with limited ability to withstand future financial and operational headwinds.
Newsom concludes by taking a swipe at the alternate plan from the ad hoc group of bondholders:
The state remains focused on meeting the needs of Californians including fair treatment of victims–not on which Wall Street financial interest fund an exit from bankruptcy.
Newsom appears to have solid public support for pressing PG&E. According to the LA Times, a recent poll of likely voters fewer than one in eight think PG&E should be allowed to fix itself. The company’s track record, state Senator Bill Dodd said, is more than checkered: “We all know that we can’t trust PG&E to do the right thing or even follow the law.”
PG&E shares traded down more than 25% in Monday’s premarket to $8.37. Shares closed Friday at $11.24. The stock’s 52-week range is $3.55 to $25.19, and the 12-month consensus price target is $14.94.
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