WHEN EMERGING FROM CHAPTER 11 MEANS REINVENTING THE ENTERPRISE

Overview

  • The 2017 and 2018 wildfires in heavily forested northern California left thousands homeless, resulted in numerous fatalities, incinerated vast tracts of woodlands, and inflicted tens of billions of dollars in property damage
  • Pacific Gas & Electric (PG&E), the energy utility serving the region, faced substantial damage claims stemming from the fires, as well as harsh criticism of its wildfire safety practices
  • To resolve the claims, fund new investments in wildfire safety, address longstanding concerns about the utility’s governance and safety record, mitigate future liability exposure, and rebuild investor confidence in the company, PG&E filed for Chapter 11 protection in January 2019
  • Seventeen months later, PG&E emerged from Chapter 11 with a fully consensual agreement that resolved all wildfire victim, lender, and investor claims, funded a new wildfire management program, and restored the Company’s financial foundation

The PG&E case demonstrates how Chapter 11 proceedings can offer an opportunity to create a new and better business

THE SITUATION: DROUGHTS AND RISING TEMPERATURES SET THE STAGE FOR DISASTER

For several years preceding PG&E’s Chapter 11 filings, the state of California had suffered an extended drought, which created new and expanded wildfire risks for PG&E. When risk became reality, the potential liabilities facing PG&E were magnified by the unique California legal doctrine of “inverse condemnation,” which imposed strict liability on PG&E whether or not it was negligent in equipment maintenance and risk management. Ratings agencies responded by repeatedly downgrading PG&E’s debt, which the Company relied on to fund operations. The downgrades made the Chapter 11 filing by PG&E all but inevitable.

THE APPROACH: STABILIZE FINANCES, RESOLVE DAMAGE CLAIMS, STRENGTHEN A SAFETY CULTURE

The bankruptcy filings, featuring DIP financing of an unprecedented $5.5 billion, aimed to:

  • address and resolve wildfire victim claims
  • keep the business running in a stable financial environment
  • fund investments in safety, reliability, and mitigating future wildfire risks
  • service, refinance, or satisfy PG&E’s outstanding funded debt obligations

To achieve those objectives, PG&E and its advisory team advanced along multiple fronts simultaneously.

As its first priority, PG&E launched settlement talks with three separate wildfire victim claimant constituencies. To begin to rebuild stakeholder trust, the company changed out its CEO and board and appointed AlixPartners representatives as CRO and Deputy CRO. PG&E also greatly expanded its wildfire safety activities, and by finalizing its reorganization arrangement by June 30, 2020, qualified to participate in the $21 billion Go Forward California Wildfire Fund, which defined in legislation a longer-term risk-mitigation response to inverse condemnation.

During the same time frame, PG&E fundamentally overhauled its cost structure and operations, which enabled the Company to produce a viable five-year business plan and financial forecast that could support a significant capital raise.

THE SOLUTION: A HEALING PROCESS BEGUN, A UTILITY TRANSFORMED

The management changes facilitated comprehensive restructuring negotiations with stakeholders, which ultimately produced damage settlements aggregating to $25.5 billion. The settlements, coupled with the cost-containment initiative and safety enhancements, cleared the way for the capital raise. New capital consisted of a record $12 billion equity backstop commitment, $9 billion in new equity capital and $22 billion in new funded debt—the largest-ever financing for a chapter 11 exit.

The restructuring enabled a more financially stable, operationally efficient, safety-conscious P&E to emerge from Chapter 11, while leaving the Company’s headcount substantially unchanged at 24,000.

when it really matters alixpartners 2019

WHEN IT REALLY MATTERS: EBITDA IMPROVEMENT IN SEVEN MONTHS—AND A HIGHLY PROFITABLE EXIT IN FIVE YEARS

The performance improvement achieved at our client’s newly acquired portfolio company—an $11 million increase in annual EBITDA in just seven months—speaks volumes about the importance of implementation planning early in the investment game.

  • The outcomes of this case show how AlixPartners’ approach is distinctive in other respects as well. Specifically:
  • We support our PE clients throughout all stages of the investment lifecycle, including pre-transaction, pre-close planning, value creation, and achievement of full potential. 
  • We help clients with crisis management in all stages of the lifecycle—such as determining how to turn around a target that’s in bankruptcy or getting a struggling transformation program back on track at a newly acquired business.
  • We identify, drive, and help secure sustainable improvements in portfolio companies’ performance.
  • We work side-by-side with PE sponsors and their portfolio companies’ management teams to ensure that deals deliver the intended value. 

Our unique approach enabled this client to quickly restore their distressed portfolio company’s EBITDA performance to levels that attracted a buyer willing to pay a handsome price—one that nearly doubled the investment value at exit.

The performance improvement achieved at our client’s newly acquired portfolio company—an $11 million increase in annual EBITDA in just seven months—speaks volumes about the importance of implementation planning early in the investment game.

  • The outcomes of this case show how AlixPartners’ approach is distinctive in other respects as well. Specifically:
  • We support our PE clients throughout all stages of the investment lifecycle, including pre-transaction, pre-close planning, value creation, and achievement of full potential. 
  • We help clients with crisis management in all stages of the lifecycle—such as determining how to turn around a target that’s in bankruptcy or getting a struggling transformation program back on track at a newly acquired business.
  • We identify, drive, and help secure sustainable improvements in portfolio companies’ performance.
  • We work side-by-side with PE sponsors and their portfolio companies’ management teams to ensure that deals deliver the intended value. 

Our unique approach enabled this client to quickly restore their distressed portfolio company’s EBITDA performance to levels that attracted a buyer willing to pay a handsome price—one that nearly doubled the investment value at exit.

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When it really matters in the life of a company, AlixPartners works side by side with our clients.