PG&E Plays Its $13.5 Billion Hole Card

After taking a beating in a Friday letter from California Governor Gavin Newsom, bankrupt utility PG&E Corp. (NYSE: PCG) on Monday fired back. The company announced Tuesday morning that it had amended its restructuring support agreement with “certain” representatives of wildfire victims “to reaffirm the parties continued support of the $13.5 billion settlement” proposed early last week by the company.

Newsom’s authority to exercise his “sole discretion” concerning whether the agreement met the requirements of state legislation (Assembly Bill 1054) has been erased from the restructuring agreement. The latest amendment “eliminates” Governor Newsom’s veto power over the agreement PG&E reached with shareholders and victims.

Under the legislation, Newsom never had the legal authority to approve or disapprove of any agreement between the company and its victims. His authority to terminate the $13.5 billion agreement was part of the agreement itself.

Now that Newsom has detailed his objections to the restructuring agreement, the company has filed an amended agreement deleting the paragraph that gives Newsom the right, “in his sole discretion,” to terminate the agreement automatically.

When the company filed its first amended agreement last week, the governor’s automatic termination authority remained intact: “The Parties have agreed not to challenge in the Bankruptcy Court the Governor’s exercise of his judgment as to these matters.” And technically, the company, shareholders and victims have not challenged Newsom’s rejection of the agreement. They’ve merely amended the agreement for a second time, stripping Newsom of the authority given him in the prior amended agreement.

Will Newsom counter? He could seek to intervene with the bankruptcy judge and, unless the judge tosses Newsom’s effort, the intervention would take time to decide. Even if the judge tosses out a complaint from Newsom, the governor could still file a lawsuit and eat up more time. And time is one thing that is in short supply for PG&E. The company must have an agreement in place by June 30, 2020, in order to be eligible to participate in the new state Wildfire Fund.

Ultimately, Newsom probably has to bet his chances for reelection on pushing PG&E to the wall. Attorneys for 21 victim claimant groups and attorneys for two shareholders (Abrams Capital Management and Knighthead Capital Management) have signed the new amendment stripping Newsom of his authority.

Investors appear to believe that PG&E has won this round, pushing the shares up by about 4.6% Tuesday morning, after dropping nearly 14% on Monday. Shares traded mid-morning Tuesday at $10.10, in a 52-week range of $3.55 to $25.19.