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  • J.B. Heaton

Law360 Article on $PCG

PG&E's Fate May Rest With One Of Its Sharpest Critics

By Dorothy Atkins

Law360 (March 23, 2020, 9:23 PM EDT) -- U.S. District Judge William Alsup may be the final hurdle for PG&E Corp. in meeting a June deadline to emerge from bankruptcy and access billions in state funding, but winning a green light from the jurist, who has repeatedly criticized the utility over the years, won't be an easy task. Since PG&E filed for Chapter 11 protection in January 2019, U.S. Bankruptcy Judge Dennis Montali has largely greenlighted its proposed reorganization plan, which will allow it to issue up to $9 billion in new common stock and take on nearly $11 billion in new debt. However, Judge Alsup, who is presiding over a yearslong criminal case against the utility over the deadly 2010 San Bruno gas pipeline explosion, has repeatedly criticized it for paying out billions of dollars in dividends to shareholders while failing to do enough to prevent deadly wildfires. In 2016, PG&E was convicted on five criminal counts for violating pipeline safety standards leading up to the 2010 San Bruno gas line explosion and a separate count for obstructing a subsequent federal investigation into the disaster. In its sentencing, the court ordered PG&E to pay a $3 million fine and placed it on probation for five years, during which it was explicitly forbidden from committing another crime. But last year, Judge Alsup found the utility had violated the terms of that order by not reporting to its probation officer that it was under criminal investigation for causing multiple wildfires. Judge Alsup then imposed new terms, including barring the utility from paying investors dividends unless it complied with new vegetation management requirements, while threatening to impose more conditions. That may happen in light of PG&E’s announcement Monday that it had struck a deal to plead guilty to 84 counts of involuntary manslaughter and one count of unlawfully starting a fire in connection with the 2018 Camp Fire that destroyed the town of Paradise and killed 85 people. A PG&E spokesperson said in a statement Monday that the utility doesn’t expect the plea deal to affect the bankruptcy proceedings and that it remains on track to have its reorganization plan confirmed by June 30, which is the deadline set by state lawmakers for it to access $21 billion in taxpayer-backed state wildfire funds. But J.B. Heaton, a managing member of the financial research firm One Hat Research LLC, told Law360 Monday that Judge Alsup has many potential “tools” available to him as a result of PG&E’s criminal liability. The judge could force additional punishment and undo what is proceeding in the bankruptcy court, he said. “Judge Alsup is really the only one who can do anything at this point,” he said. Although California Gov. Gavin Newsom was once a sharp critic of PG&E and threatened to have the state take it over if significant changes weren’t made, the governor did an abrupt about-face last week and threw his support behind the reorganization plan, citing changes PG&E had agreed to make in response to his concerns. But Heaton called the governor’s deal with PG&E — under which the utility agreed to forgo shareholder dividends for three years — a “total failure” that is in “no way” a victory. He added that if the plan is confirmed, PG&E will be able to tap into billions in state taxpayer funds while retaining billions in equity and unsecured debt, which would have been wiped out in a typical corporate bankruptcy proceeding. “This is not how bankruptcy is supposed to work, and it’s not how bankruptcy works most of the time,” he said. Heaton said the governor’s apparent change of heart also appears to be driven by the need to prioritize fighting the coronavirus outbreak as opposed to battling the nation’s largest utility over updating its aging infrastructure. “I don’t think anyone can blame Gov. Newsom for keeping an eye on the bigger ball,” Heaton said. However, Heaton criticized Judge Montali’s approach to the bankruptcy, saying the judge has shown throughout the proceedings that he’s willing to “plough through” PG&E’s proposed reorganization plan despite knowing that funds will eventually be diverted away from improving PG&E’s infrastructure. “You have the judge sitting on top of the freight train saying, ‘I’m going to get this done … come hell or high water,’” Heaton said. “Newsom’s failure is an understandable failure, but it’s not an understandable failure for the judge.” Ultimately, Heaton said, if the plan is approved, it will raise questions about whether bankruptcy is effective for privately held utilities. He added that whether solvent companies like PG&E should be allowed to emerge from bankruptcy and continue to pay shareholders massive dividends is a question that is currently being debated before Congress over corporate bailouts. “The idea that you're going to let a company tap billions of dollars of taxpayer funds and let them pay out dividends — just giving money away, because it’s a pure giveaway — and it’s legal if you're solvent? This is really sad,” Heaton said. “People really have to look at this and ask if a private utility framework can work.” Heaton added that the wildfire liability risks that drove PG&E into bankruptcy still exist, which he said is why many claimants in the bankruptcy are eager to get a plan approved quickly so that new claims don’t trump their existing claims. “The sad part about this is somebody is going to die. Somebody is going to die in the future, because there will be more wildfires,” he said. “Meanwhile, [PG&E] wins. They win again.” --Additional reporting by Mike Curley. Editing by Philip Shea and Alanna Weissman.

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