Pacific Gas & Electric Company shareholders are facing the possibility of a worst-case scenario -- the value of their holdings getting completely wiped out -- after a federal bankruptcy judge’s ruling.
U.S. Bankruptcy Judge Dennis Montali decided this week that the California utility doesn’t have the ability to solely control its reorganization and that a plan put forth by bondholders, led by the hedge fund Elliott Management and supported by California citizens with wildfire-damage claims against the utility, must be considered.
The plan leaves current shareholders with a much smaller stake in the reorganized company than management had proposed, according to the New York Times.
PG&E filed for Chapter 11 bankruptcy protection in January because of liabilities stemming from deadly wildfires in Northern California in 2017 and 2018.
The judge's decision caused PG&E shares to plunge 26.2 percent this week, the biggest percentage drop since January.
"The plan by Elliott and the bondholders was supported by both the creditor's committee and by the parties damaged by the fires," Eric Snyder, chairman of the bankruptcy practice at NYC-based law firm Wilk Auslander, told FOX Business. "And that's two constituents that the court couldn't ignore because the creditors committee is the pivot, they're the ones that have the most at stake."
The decision should send shivers down the spine of PG&E shareholders, who would bear the brunt of the decision if the Elliott plan were to proceed.
“In the worst case, the competing plan could win and completely wipe out current shareholders,” Greg Gordon, an analyst at Evercore ISI, wrote after the ruling. “In other words, zero is possible.”
Daniel Ford, an analyst at UBS agrees that PG&E shareholders could get hit hard. He lowered his price target to $10 to “reflect an average value of the company's plan of reorganization." He said shares would be worth $19 if PG&E's plan were to move forward and that their value would plunge to 3 cents if Elliott's proposal was approved.
PG&E has slammed the bondholders' propsal, telliing Montali that the plan would lead to an "unjustified windfall."
The utility earlier this week shut off power for roughly 800,000 customers – about 2 million individuals – in north and central California amid concerns extreme wind and dry weather could spark new wildfires caused by downed power lines.
The decision drew the ire of California Governor Gavin Newsom.
“This is not a climate change story as much as a story about greed and mismanagement over the course of decades,” he said. “Neglect, a desire to advance not public safety, but profits.”