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.