BlueMountain letter to PGE dated 1.17.19

Transcript

1 280 Park Avenue 12th Floor 10017 New York, NY T. 212 905 3900 F. 212 905 3901 , 2019 7 January 1 The Board of Directors (the “Board”) of PG&E Corp (“PG&E” or the “Company”) oration Company The Board of Directors (the “Utility Board”) of Pacific Gas and Electric (“Utility”) 77 Beale Street P.O. Box 770000 San Francisco, California 94177 Dear Members of the Board: collectively, “ we ” or “us” ). As a PG&E We are writing to you on behalf of BlueMountain Capital Management, LLC ( , shareholder, we write to challenge the Board’s plan for a damaging, avoidable and unn ecessary bankruptcy. There is We simply cannot recall a situation where such a valuable company filed overwhelming evidence that PG&E is solvent. questions about the necessity of doing so. for bankruptcy with such blatant - K filed January 14, 2019 (the “8 We are aware (based on your Fo K”)) that the Board and the Utility Board have rm 8 - – the fiduciary determined that a Chapter 11 filing “is appropriate, necessary and in the best interests of all stakeholders” rations. standard commonly ascribed to insolvent corpo because PG&E is solvent , the Board continues to have However, a duty to act in the best interests of the and its shareholders, and not in the best interests of “all stakeholders.” Company It may appear easier for Board members to A Chapter 11 filing while PG&E is solvent is an utter abdication of this duty. file for Chapter 11 – shifting the burden of dealing with the myriad issues that will face the Board and placing it squarely Company but it will destroy value for the – oulders of the Bankruptcy Court and the companies’ advisors on the sh and in particular its shareholders – only groups to which you owe a duty. the Before improper and damaging leaks of confidential boardroom information, every Wall Street analyst found PG&E to have a large capital cushion, and both major ratings agencies found PG&E’s credit to be investment - grade. Furthermore, – with no mentio n of contingent regulatory we believe that the inflated and premature estimates of contingent liabilities – used to justify the Chapter 11 filing are at best inappropriate, and a further abdication of your recovery or tax assets fiduciary responsibilities. bankruptcy is not only damaging to the shareholders A it also harms the Company . It risks depressed asset sales, increased , cost of near - term and emergence financing, and losing access to attractive securitization financing available under California Senate Bill 901 (“SB90 1”). Indeed, the leaks have already damaged goodwill with regulators and the public, at K “ a time when PG&E needs it most. One legislator called the 8 - deeply concerning news” and ceased work on potentially 1 beneficial legislation. As a result, we implore the Board to undertake a solvency analysis immediately based on the parameters set forth in Exhibit A to this letter. 1 - file - bankruptcy - following - devastating - california - wildfires/ https://www.washingtonpost.com/technology/2019/01/14/pge 13533478.php - E - - PG https://www.sfchronicle.com/politics/article/California - l awmakers - in - no - hurry - to - help - out Page 1 of 6

2 We hold the Company’s advisors in high regard from their prior work successfully advising corporations with more credible solvency in ways to preserve shareholder value. We expect them to bring this expertise to questions than PG&E reasonably that – with potentially bear as comprehensively, , and impartially as possible. However, we do believe e – extraordinary professional fees at stak the a dvisors have at least the appearance of a financial conflict, and therefore we believe the Board must obtain second opinions from advisory firms that not be hired in any capacity following would a 2 potential bankruptcy filing. In the event of a b ankruptcy filing, the Board should expect that shareholders may use estate assets to vigorously investigate , Shareholders have breaches of fiduciary duty, breaches of confidentiality conflicts of interest, and other causes of action. tools to pursue these actions in bankruptcy ample includ ing the official committee of equity holders, ongoing shareholder , rights under the bylaws, and the appointment of a Chapter 11 examiner. D iscovery can extend even to privileged material at shareholders’ direction , and therefore we request that all documents be preserved. The Board should instead pursue ordinary - - undertake its solvency analysis . As the C ompany admits course financing and re PG&E could extend its liquidity fo , “ K - in the 8 . We discuss r an extended period of time” by utilizing available financing this further in Exhibit B . Until there is more clarity, it is the Board’s duty to manage through these hard times, not capitulate. The C ompany has ample liquidity to operate its business; the amount of There is no urgency to an imminent filing. liabilities remains uncertain and contestable; there are meaningful probabilities of offsets from settlements and cost Board Hence, at the very least, the should recovery; and any potential liabilities are payable in the future. wait to take its case to shareholders at the upcoming annual meeting . We understand the emotional stress and personal time constraints that may have contributed to the Board’s actions. It is Nevertheless, a bankruptcy filing which not lost on us th at the Board’s recent actions come as it searches for new members. violates fiduciary duties is not the solution , or select successors who will . T he Board should carry out its fiduciary duties , allow shareholders to choose new directors who will honor their fiduciary duty. We trust you will all make the right decision. Sincerely, BlueMountain Capital Management , LLC 2 California law requires that directors undertake “reasonable inquiry” into the advice of external advisors. Directors may not proceed to rely 309(a)). on advisors when in possession of “knowledge that would cause such reliance to be unwarranted” (Cal. Corp. Code § Page 2 of 6

3 Exhibit A. Solvency Analysis The Board must exercise their reasonable inquiry duties and immediately undertake a reasonable and unconflicted solvency analysis . To be proper, we believe this requires the retention of disinterested advisors who would not stand to benefit financially if PG&E were to file for bankruptcy. The evidence for PG&E’s solvency is overwhelming. As of December 31, 2018 – nearly two months after the Camp Fire Moody’s, S&P, – 18 separate Wall Street analysts found PG&E solvent, with a consensus equity valuation of $20 billion . and Fitch all affirmed investment grade ratings. It is insufficient to merely say “ such liability could exceed $30 billion” and conclude that PG&E – whose market and good business capitalization exceeded $35 billion before the wild fires, is therefore insolvent. Courts have held – 3 judgement dictates – that a more nuanced analysis is required. reasonable and informed estimates are incorporated for settlements, causation, cost recovery, tax assets, insurance When return increases, the Board will no doubt realize that PG&E is comfortably solvent , with expected net cash assets, and for wildfire liability only in the single - digit billions of dollars. These future cash payments can be offset by just payments a few years of retai ned earnings while operating in the ordinary course. PG&E’s wildfire liabilities are contingent and cash outflows would not begin for years A correct solvency and liquidity analysis must consider the timing of potential judgements. T here has not been a single judgement entered against PG&E or the Utility in relation to the 2017 or 2018 wild fires . Therefore, the liabilities are contingent and uncertain . Indeed, it could take up to a decade for this litigation to be resolved and exact judgements t o be known. To illustrate trial phase and will not begin to be tried until two - fires is still in the pre wild , litigation relating to the 2017 years after the event. There will be full trials to determine the causes of over a dozen such trial involving fires, each wild dozens of witnesses, experts, and pieces of evidence. Only then can the damages related to each of several thousand be determined at a time. structure structures , one In the interim, PG&E can continue to operate profitably and build up it s asset base to pay potential claims. The solvency analysis must consider the impact of settlements . A correct solvency analysis must consider the ability to settle claims The available evidence shows that these claims can be settled at - 57.5% of face value. 35 The basis for such settlements include the time value of money, legal costs, uncertainty on causation, and the uncertainty of recovering non - property claims and reconstruction value under inverse condemnation. Moreover, there are numerous historical precedents for such settlements. After the 2007 Witch Fire, San Diego Gas and Electric (“SDG&E”) reached a settlement where “SDG&E has paid or will ” pay 57.5 percent of the approximately $1.6 billion paid or reserved for payment by the insurers to their policyholders . 4 fires, This . After the 2017 wild of face value it was reported that an insurance company so ld its subrogation rights for 35 % is a good indication of where subrogation parties may be willing to settle. 3 In Re Xonics Photochemical, Inc. , 841 F.2d 198 (7th Cir. 1988). In Re Imagine Fulfillment Services, LLC , 489 BR 136 (Bkrtcy.C.D.Cal. 2013). 4 01 pg - e . https://www.bloomberg.com/news/articles/2019 - This news was - 14/baupost - is - said - to - buy - 1 - billion - in - insurance - clai ms - on - publicly reported only days ago, and the Company’s auditors should be made aware of its implications. Page 3 of 6

4 The solvency analysis must consider the uncertain causation of the Tubbs Fire ased owned equipment on the evidence that PG&E has reviewed to date, we believe that customer - PG&E has stated that “ [b] 5 may have been the cause of the Tubbs fire.” of California - County of San Francisco and the U In fact, PG&E has filed pleadings before the Superior Court Distri ct .S. Court for the Northern District of California in furtherance of this theory. Counsel for PG&E stated that the evidence to “ private electrical facilities that were replaced by unlicensed third parties without permit or inspection as the points 6 .” cause of the Tubbs Fire We hope the Board has taken a consistent view in its solvency analysis. In the future , the Board may be judicially estopped was the cause of the Tubbs Fire. PG&E from testifying that it believed – for purposes of its solvency analysis – that The solvency analysis must consider regulatory assets A correct solvency analysis must include c ontingent regulatory assets for future cost recovery. are able to recover extraordinary wildfire - related costs from ratepayers provided Under relevant California law, utilities . they meet the “prudent manager” standard Following the 2003 wildfires, both Southern California Edison and SDG&E were able to recover certain wildfire - related costs. We are aware that California Public Utilities Commission (the “ CPUC ”) found that SDG&E was unable to , in 2017, the recover $379 the related to the Witch, Guejito, and Rice wild fire s . The CPUC held that SDG&E failed to meet million energization, telecommunications clearance, an “prudent manager” standard by its failure to follow de - d vegetation management rules. fires. wild This precedent does not mean the PG&E is ineligible for cost recovery on the 2017 and 2018 It means that A PG&E it was not a “prudent manager . ” is only ineligible to recover costs where the facts demonstrate t th is point it has – which – if any fires have fact patterns of the 2017 and 2018 wild not been adjudicated where PG&E failed to meet the “prudent manager” standard. The available evidence shows that a “broken C - hook” on a PG&E transmission line may have been the cause of the Camp a Fire. PG&E would likely satisfy the “prudent manager” standard if this device failed due to a manufacturing defect by failed due to metal fatigue , which cannot be ident device the ified by the supplier . It would also have a strong case if industry standard aerial and ground patrols that PG&E said it performed. - SB901 , signed into law on September 21, 2018, further extends PG&E’s ability to pursue cost recovery for a portion of the 2017 wildfire costs through the issuance of securitization bonds . 8 The C ompany’s ” - K notes that it does not expect this securitization to occur “on an expedited or emergency basis . This timing related observation has limited bearing on a solvency analysis. If some amount of sec uritization is probable, then - PG&E’s solvency analysis must reflect a corresponding regulatory asset. 5 - its case - https://www.pressdemocrat.com/news/9127264 - 181/pge - is - building 6 Joint Case Management Conference Statement, California North Bay Fire Cases , JCCP No. 4955 (Superior Court of the State of California, County of San Francisco). Page 4 of 6

5 The solvency analysis must consider tax assets contingent liabilities. A correct solvency analysis must include the contingent tax asset created by wildfire PG&E will be able to defer future tax payments under Federal and California law by utilizing the net operating losses fires. wild by settlements or judgments paid in connection with the created The solvency analysis must consider insurance assets A correct solvency analysis must include the value of insurance contracts. of insurance coverage for wildfires during the 2017 and 2018 billion . PG&E notes that it has $2.24 The solvency analysis must consider rate of return in creases PG&E A correct solvency analysis must consider the likelihood that succeeds in increasing its rate of return under relevant proceedings. This is directly tied to the wildfire issue. The CPUC has held that utilities are business undertakings attended by entitled to earn a rate similar to those of “ 7 corresponding risks and uncertainties.” forest health the risks and uncertainties of wildfire liability have increased due to climate change and poor As , PG&E has begun to seek higher rates of return. , requesting an On October 1, 2018, PG&E filed its TO20 rate case with the Federal Energy Regulatory Commission y April 20, 20 19, increase in its equity rate - of - return from 10.75% to 12.5 0 %, and b PG&E must file its petition with the CPUC for a similar proceeding. The solvency analysis must factor in the value created by PG&E potentially succeeding in these proceedings. 7 Public Utilities Commission of the State of California, Decision on Base Year 2010 Cost of C apital and Subsequent Years' Adjustment - 05.htm (citing Mechanism for Great Oaks Water Company , (Dec. 16, 2010), http://docs.cpuc.ca.gov/published/Final_decision/128615 , 262 U.S. 679 (1923)). Virginia Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Page 5 of 6

6 A nalysis Exhibit B. Liquidity them to bolster its liquidity. PG&E and the Utility must use the capital markets alternatives available to ompany’s access to liquidity is undisputed The C C The t he C ompany ’s 8 - K n otes that “ PG&E ompany does not dispute that it has access to adequate liquidity. Indeed, could extend its liquidity for an extended period of time by using its assets to secure the issuance of additional capital or by accessing such forms of alternative capital.” contracted trade and collateral after facing cash, even ted The same statement notes that PG&E has $1.5 consolida billion in terms. The wildfire liabilities are not immediately payable As discussed, there has not been a single judgement entered against PG&E for the 2017 or 2018 wild fires. The litigation - is only in pre trial phase. Material cash payments on account of judgements are not expected to commence for a year or longer. Therefor e, the wildfires have limited bearing on the near - term liquidity analysis. Board if must pursue secured debt The needed ely unsecured capital structure and extensive ability to raise secured debt. As a former investment has an entir The Utility grade issuer, the Utility benefits from relatively permissive debt indentures. to study ways to the Company and its shareholders, should direct disinterested advisors The Board, acting as fiduciaries of maximize secured debt capacity under these indenture s. hey should provide Counsel should study the drafting of the bonds’ “equal and ratable” language. Among other topics , t opinions on: - The correct period of financial statements to use when calculating “ Net Tangible Assets ” upon the incurrence of secur ed debt . . and the ability to grant liens on such excepted property - The exceptions to “Principal Property” Finally, the equal and ratable ompany should consider securing all of its debt to comply with the “ C ” language if necessary to maintain its liquidity and access to financing. The Board must pursue alternative financing if needed asset sales or If the Board finds that secured debt is insufficient to service liquidity needs, it must exhaust all avenues to pursue asset sales or alternative financing. Asset sales may include sales of the corporate headquarters, other real estate , or entire business segments. tcy, which subject achieve greater valuations than sales in bankrup and would These sales can occur in ordinary course potential buyers to greater public scrutiny. level financings. - financings might include preferred stock, holding company debt, or asset Alternative Page 6 of 6

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