A U.S. bankruptcy judge's June 20 order confirming the roughly $58 billion joint restructuring plan of embattled California utility Pacific Gas and Electric Co. and its parent company, PG&E Corp., sets up a complicated series of transactions designed to rid the companies' balance sheets of crippling wildfire liabilities and rebuild their financial foundation for a future that remains clouded with risk.

"These cases are among the most complex in U.S. bankruptcy history," Judge Dennis Montali, who has presided over the proceedings in the U.S. Bankruptcy Court for the Northern District of California in San Francisco, said in an accompanying memorandum.

After a year and a half in bankruptcy protection, the companies' victory in court unleashes a sequence of debt and equity deals that are expected to be completed in July, triggering implementation of settlements covering tens of thousands of creditors, including more than 70,000 victims of wildfires tied to Pacific Gas and Electric, or PG&E, infrastructure. Gaining court consent ahead of a state-imposed June 30 deadline also gives PG&E access to a $21 billion statewide wildfire fund to offset the costs of future utility-sparked wildfires.

The restructuring plan's funding sources include roughly $33 billion in new and reinstated utility debt, facilitated by a deal with major bondholders, including Elliott Management Corp. and Pacific Investment Management Co. LLC. That is considerably more debt than PG&E had when it entered Chapter 11, though lower interest rates will apply. Additional funding sources include $4.75 billion in new debt for PG&E Corp. and $15.75 billion in new equity in the reorganized holding company.

Much of that will be held by the wildfire victims trust, which with an estimated $6.75 billion, or 22.19%, of common stock will become the single largest shareholder in PG&E Corp. No other shareholder will have more than 10%.

'Wall Street did extremely well'

The new investors will fill positions expected to be vacated by several large hedge funds. Among institutional owners, hedge funds held more than 50% of PG&E Corp. entering the second quarter of 2020, according to S&P Global Market Intelligence data.

Some of the hedge funds, including Abrams Capital Management L.P. and Knighthead Capital Management LLC, purchased the stock at rock-bottom prices as PG&E and its parent company entered Chapter 11, and those funds helped to shape the restructuring plan.

"I think, based on the price of acquisition, Wall Street did extremely well on this deal," Jared Ellias, a law professor at the University of California's Hastings College of the Law, said in an interview.

PG&E will direct a large part of the new funding to $25.5 billion in settlements with wildfire creditors, including $13.5 billion in cash and equity for individual victims, $11 billion in cash for holders of insurance subrogation claims and $1 billion to public entities.

Payouts could take years, since some cash payments to wildfire victims are deferred and the trust will be barred from immediately selling shares. Moreover, actual claims must still be vetted.

Power contracts

PG&E should leave bankruptcy with a power mix that largely resembles the one it had when it entered, dominated by renewable energy and natural gas contracts. The utility said it will assume all $42 billion in power purchase agreements, or PPAs, totaling 387 contracts with about 350 counterparties. More than half of the 13,668 MW under contract at the time PG&E filed for Chapter 11 is renewable energy capacity.

The utility negotiated project price reductions and timing delays on some of its battery storage and solar contracts.

Fitch Ratings on June 17 upgraded its rating on $855.7 million in outstanding debt for one major project holding a contract with PG&E, Berkshire Hathaway Inc.'s 585.9-MW Topaz Solar Farm, one of the world's largest solar projects. All three big rating agencies downgraded that project and several others with PG&E contracts to junk status when the utility filed for bankruptcy.

The utility's anticipated emergence from Chapter 11 "materially reduces the risk of uncompensated termination or modification of the power purchase agreement," Fitch said.