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PG&E : Paul Singer's Elliott Scores a Big Win

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07/12/2019 | 02:49am EDT

By Matt Wirz

The California legislature delivered a preliminary victory to hedge-fund billionaire Paul Singer and other PG&E Corp. bondholders in their monthslong battle with the utility's shareholders.

Mr. Singer's firm, Elliott Management Corp., is one of the biggest owners of bonds issued by the power company, which filed for bankruptcy protection in January while estimating that it could owe tens of billions of dollars to victims of the state's deadly 2017 and 2018 wildfires. The investors have been lobbying in Sacramento for months to sway the wildfire-liability bill the legislature passed Thursday, people familiar with the process said.

The legislation requires utilities to contribute as much as $10.5 billion into a wildfire insurance fund and billions of dollars for wildfire prevention, while capping future liabilities. Bondholders and shareholders alike support the broad strokes of the measure, but have clashed over an obscure point that may decide which group ultimately controls the company, the people familiar with the process said.

The skirmish over the reform bill shows how the funds involved are reaching deep into California politics to gain an advantage. Their lobbying has forced the state's politicians into a delicate balancing act, forming policies that keep investors willing to inject more cash into PG&E but don't come at the expense of wildfire victims and electricity customers.

For PG&E to emerge from bankruptcy, it must have funding to pay out claims from insurers and victims hurt by past wildfires it caused, estimates of which range from $14 billion to $54 billion.

Holders of the company's stock, such as Abrams Capital Management LP, Knighthead Capital Management LLC and Redwood Capital Management LLC, petitioned lawmakers to include language in the bill that would have allowed the company to pay for those liabilities by issuing a new bond backed by income that would otherwise be paid to shareholders.

The bondholders, who proposed to invest as much as $18 billion to meet liabilities in exchange for control of the company, argued that doing so would weaken PG&E's finances, according to people familiar with the matter. Firms beside Elliott in the group include Apollo Global Management LLC, Capital Group Cos., Citadel Advisors LLC, Davidson Kempner Capital Management LLC, Pacific Investment Management Co. and Värde Partners.

California lawmakers and Gov. Gavin Newsom's staff spent months working on the reform bill and met multiple times with both investor groups, the people familiar with the process said.

Legislators ultimately sided with bondholders on the issue, writing a bill that allows PG&E to issue the securitization bonds to pay victims from future wildfires, but not to pay off claims from fires it already caused.

"Under this bill, PG&E can't borrow against the future earnings to solve for the problems that got it into bankruptcy," said Michael Wara, head of the climate and energy policy program at Stanford University's Woods Institute. "That's a good thing for the state, but maybe not so much for shareholders."

Investors appear optimistic that both groups can come out ahead. PG&E shares closed at $21.40 Wednesday, well above prices that members of the shareholder group paid for their stakes. The company's frequently traded bond due 2034 traded at 112 cents on the dollar Wednesday, up from a low of 78 cents in January, according to MarketAxess.

The shareholder group supports the new bill and could press for passage of new legislation allowing issuance of bonds to fund existing wildfire-claim settlements, a person familiar with the group's thinking said. Equity holders also have a key advantage over bondholders because they appointed PG&E's new management and, for now, only the company can propose legally binding bankruptcy plans to restructure it.

The next clash stands to be in a court hearing this month, when bondholders will argue to remove PG&E's exclusive right to file a restructuring plan. If they succeed, Elliott and others in the bondholder group will be able to galvanize more support for their own proposal to revamp the company.

Elliott's involvement could make PG&E's restructuring even more contentious, because the fund has a reputation for employing hardball tactics to pressure opponents ranging from the government of Argentina to corporate executives, said a person involved in California politics. "The governor does not want to be seen standing next to Elliott at a press conference about this," the person said.

Mr. Newsom's office couldn't be reached for comment.

Write to Matt Wirz at matthieu.wirz@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
PG&E CORPORATION -0.79% 17.65 Delayed Quote.-25.68%
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Sales 2019 17 465 M
EBIT 2019 3 206 M
Net income 2019 1 336 M
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