Fires

Investors flee PG&E in wake of Kincade Fire, takeover threat from hedge funds

The possibility that a faulty PG&E Corp. transmission tower sparked the Kincade Fire in Sonoma County could jeopardize the utility’s chances of successfully emerging from bankruptcy and avoiding a hostile takeover attempt.

PG&E’s shareholders sprinted for the exits Friday, driving the company’s stock price down to $5 a share — a plunge of about 30 percent — on the first day of trading after PG&E told California regulators that a high-voltage transmission tower malfunctioned in the area where the Kincade Fire erupted Wednesday night. The utility also disclosed that a Cal Fire investigator found a broken jumper cable on the tower.

The stock price is less than half what it was Jan. 29, when PG&E filed for bankruptcy. As recently as early July, it was trading over $20 a share.

Michael Wara, director of Stanford University’s Climate and Energy Policy Program and an advisor to the Legislature on wildfire issues, said the potential liability from the Kincade Fire could scare off potential investors — the suppliers of capital that PG&E desperately needs to reorganize its tattered business.

“This fundamentally alters the bankruptcy conversation ... and you see that in the stock today,” Wara said. “The basic thing that PG&E needs is an enormous injection of cash.

“Think about it, do you want to own this? If it was your money, would you want to put your money into this company after what just happened?”

Cal Fire has said it still doesn’t know what caused the Kincaid Fire. Speaking to reporters late Thursday, PG&E Chief Executive Bill Johnson said the transmission problem “does not tell us what caused the fire or where it started.”

PG&E had blacked out much of Sonoma County — and other portions of Northern California — Wednesday afternoon as a precaution against gusting winds. But the utility only cut power to its distribution wires, the lines that bring electricity to individual homes and businesses. It kept juice flowing to its transmission lines, which deliver power over long distances. PG&E said distribution lines bring greater risk because they run much closer to trees.

The Kincade Fire had burned through 21,900 acres and was only 5 percent contained, Cal Fire reported Friday. Though it wasn’t yet a major disaster — only 49 structures have been destroyed — firefighters are racing to improve containment before the winds kick up again this weekend.

Hedge funds in better position

Even if the liabilities from the fire aren’t enormous, Jared Ellias, an expert on bankruptcy law at UC Hastings College of Law, said the Kincade Fire could strengthen the hand of a group of Wall Street hedge funds that own PG&E’s bonds and are trying to seize control of the company in bankruptcy.

Ellias said the bondholders have proposed pouring billions of dollars in new cash into PG&E. By contrast, the bankruptcy reorganization plan proposed by PG&E itself relies more heavily on putting new debt onto the company’s balance sheet, Ellias said.

As the bankruptcy judge weighs the two competing plans, he might lean toward the bondholders’ proposal because it could leave the company in stronger financial position, with less debt, as it exits bankruptcy. With the Kincade Fire, and the prospect of new liabilities, the bondholders’ argument “has just grown in persuasiveness,” Ellias said.

On the other hand, Wara said the possibility of more wildfire damages could make the bondholders think twice about trying to take over PG&E. That could potentially force the state to step in and run the business — something state officials to this point have wanted to avoid — he said.

Gov. Gavin Newsom, speaking to reporters Friday at a Cal Fire station a few miles south of the Kincade Fire zone, all but ruled out the state buying PG&E. But he said he is encouraging others to consider making bids for the troubled company. “There are some people looking at their assets, potentially break them up, gas division vs. electric division,” Newsom said.

The bondholders’ takeover proposal does contain an out clause — they could rescind their offer if PG&E’s equipment is found to have started another fire that destroys at least 500 buildings. (PG&E’s own proposal for exiting bankruptcy has a similar clause).

So far, the Kincade Fire damages fall well short of that threshold, although hundreds of buildings were at risk. A person familiar with the bondholders’ thinking said Friday the hedge funds “remain wholly committed” to their proposal.

PG&E must exit bankruptcy, with a plan to pay off all wildfire claims, by June 30 to be eligible to participate in an insurance fund created by the Legislature in July to pay liabilities from future wildfires. PG&E was driven into bankruptcy in January by billions in liabilities from the 2017 wine country fires and last November’s Camp Fire, which destroyed most of Paradise and killed 85 people.

The Kincade Fire adds another wrinkle to the bankruptcy case. If PG&E is found liable for the Kincade Fire, then those victims would actually get paid first, before the victims of the Camp Fire and the other disasters, Ellias said.

“If it turns out to have been PG&E’s fault, those claims will go to the front of the line,” Ellias said. Bankruptcy law is set up so any debts that occur after the company has filed for Chapter 11 must be paid first, in order to give creditors the confidence needed to do business with a company in bankruptcy, he said.

Dale Kasler covers climate change, the environment, economics and the convoluted world of California water. He also covers major enterprise stories for McClatchy’s Western newspapers. He joined The Bee in 1996 from the Des Moines Register and graduated from Northwestern University.
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