PG&E's Potential Bankruptcy Pits Shareholders Against Stakeholders


Photograph by Getty Images

As a general rule, most U.S. companies are run for the benefit of their shareholders. But the potential bankruptcy of PG&E (ticker: PCG) raises questions over whether that's true for regulated utilities.

PG&E announced last week that it plans to file for bankruptcy, in an attempt to manage the potential liabilities linked to California's deadly 2017 and 2018 wildfires.

The company's statement said its board and management sees Chapter 11 bankruptcy as its "only viable option" to address its responsibilities to "stakeholders," which it listed as "wildfire victims, customers, employees, creditors, shareholders, the financial community and business partners."

But BlueMountain Capital says that shareholders rank too low on that list. The fund owns about 11 million shares of PG&E, including shares purchased since BlueMountain's latest quarterly filing, which indicated ownership of 4.3 million shares.

BlueMountain argues in a letter published Thursday that a bankruptcy filing would be "damaging, avoidable and unnecessary." The fund claims the board would be neglecting its duty to shareholders, who have last priority in bankruptcy court, if it does file. (PG&E's shares have dropped 64% since the announcement.)

The bankruptcy process allows the company to prioritize its obligations to creditors, which including both bondholders and wildfire victims. So essentially, BlueMountain is arguing that PG&E's focus on "stakeholders" is misguided.

That strikes right at the heart of an ongoing debate: Do publicly traded companies exist solely to maximize shareholder value, or do they have a broader set of social responsibilities? There have been plenty of pixels spilled in that conversation. The U.S. has even come up with a different corporate structure that allows directors to take more parties' interests into account.

But the fund would probably have a stronger point if the company were in a different industry.

When it comes to liquidity and solvency, PG&E isn't struggling with cash just yet; it had $1.5 billion of cash and cash equivalents on Jan. 11. The utility also had investment-grade credit ratings from the three major ratings firms until last week, the fund points out. And while it could be on the hook for up to $30 billion, the total liability is still unknown. The cost to PG&E could be as low as $5 billion, according to one analyst.

The X factor here is politics. The entire utilities industry is inextricably tied up with government-especially in California, which has a long and complex history with electricity regulation.

"It appears the timing of a near-term bankruptcy is being driven behind the scenes by newly appointed Governor [Gavin] Newsom rather than any pressing liquidity or covenant trigger," wrote CreditSights analysts in a note published Jan. 14, shortly before the company's announcement.

PG&E is no stranger to politics, of course. The company reportedly lobbied hard in favor of a law that allows it to issue bonds to finance some of its wildfire liabilities. It also unsuccessfully pressed for a repeal of the state's "inverse condemnation" law that holds it responsible for damages caused by a fire if its equipment is involved, even if it follows safety regulations.

More broadly, the history of U.S. utilities regulation is a chronicle of shifting public attitudes about public and private ownership policies. Economic historian Werner Troesken characterized changes in utility operations as a " circular history " shifting between regulation and de-regulation. He found that both publicly and privately run utilities fell prey to corruption and graft, before public opinion shifted and pushed for privatization or regulation, respectively.

While PG&E is owned by its investors, the state sets the rates it can charge and the rate of return its investors are allowed to earn on their cash.

Even so, state investigators will help set the upper limit of damages that PG&E might have to pay. They are still determining the cause of the deadly Tubbs fire in 2017, and the utility has said that privately owned equipment caused the fire. If it isn't found responsible, the potential damages might fall to $15 billion, according to UBS. Insurers and individuals alike can sue the company, according to analysts at CreditSights.

BlueMountain points to the company's assertion that it isn't responsible for the Tubbs Fire as a reason not to file for bankruptcy. And if a manufacturing defect on a piece provided by a supplier caused its equipment to cause the Camp Fire, it may be able to "recover extraordinary wildfire-related costs from ratepayers," the fund argues in its letter. The fund also argues that PG&E's advisers were influenced by the potential fees that could be earned in a bankruptcy.

Even so, BlueMountain's case isn't helped by the apparent resurgence of support for populist politics. Framed another way, it could look like the fund is asking PG&E to fight harder to limit its payments to victims of wildfires that killed more than 86 people and destroyed more than 15,000 homes. Regardless of legal questions of responsibility, it's an unsavory request.

The company's bondholders, on the other hand, will probably find themselves in the same group as the victims of the wildfires. That should prove to be a more comfortable negotiating position.

Write to Alexandra Scaggs at

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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