(Bloomberg) -- PG&E Corp. shares plunged as it grappled with a court ruling that threatens to put the fate of the bankrupt power giant in the hands of outsiders and perhaps wipe out the stock.
The shares dropped as much as 32% Thursday after U.S. Bankruptcy Judge Dennis Montali stripped PG&E the previous day of exclusive control over its recovery process.
The decision escalates an already-heated battle for control of the largest utility bankruptcy in U.S. history. Montali agreed to let bondholders including Pacific Investment Management Co. and Elliott Management Corp. pitch their own restructuring plan alongside PG&E's, so they can both come up with ways the utility could deal with an estimated $30 billion in wildfire liabilities. Some of PG&E's bonds jumped to their highest levels in almost two years.
The damages, tied to blazes that its equipment ignited, forced the utility to file for Chapter 11 in January. PG&E is simultaneously trying to manage an unprecedented blackout it engineered to prevent new fires.
The loss of exclusivity is the latest twist in a massive bankruptcy case that has already attracted some of the biggest names in the financial world. A group led by Pimco and Elliott has devised a plan that would all but obliterate the stake of current shareholders in the utility.
"In the worst case, the competing plan could win and completely wipe out current shareholders," Greg Gordon, an analyst at Evercore ISI, said in a research note. "In other words, zero is possible."
Immediately after Montali issued his ruling Wednesday, PG&E shares plunged by as much as 25%. It hit just as PG&E was cutting power to hundreds of thousands of homes and businesses in Northern California in the first phase of an orchestrated shutoff designed to keep its power lines from igniting blazes.
The creditors, including the fire victims, have "spoken loudly and clearly that they want their" proposal to be considered, Montali said in his ruling. While PG&E's plan is "on track as well as can be expected," he wrote, so is the competing version from creditors.
The court denied requests by other parties to let them offer recovery plans, too.
"We are disappointed that the Bankruptcy Court has opened the door to consideration of a plan designed to unjustly enrich Elliott and the other ad hoc bondholders and seize control of PG&E at a substantial discount," PG&E said in a statement.
Under bankruptcy law, a company has a limited amount of time to develop a reorganization plan and persuade creditors to vote in favor of it. Initially, no other competing proposals are allowed, so the bondholders needed permission from Montali before they could proceed. It's unusual for a bankruptcy judge to grant such a request.
"It's a big deal, because now the shape of the reorganization is no longer in existing management's hands," said Stephen Lubben of the Seton Hall University School of Law. "Whoever can persuade a critical mass of creditors, along with the regulators, that they have a good way forward will win. That could result in a very different plan than management envisioned when they went into Chapter 11."
PG&E filed for bankruptcy on Jan. 29 to address liabilities resulting from a series of devastating fires that tore through Northern California in 2017 and 2018. The effects have been rippling through millions of ratepayers, hundreds of creditors, thousands of workers and the state's political system.
The company has argued that ending its exclusive control before the company figures out its exact wildfire liabilities would "lead to further distraction, costs and waste" and would jeopardize the company's chances of exiting bankruptcy by June 2020, a deadline set by the state.
Whether shareholders will actually suffer a total wipeout is open to question, because Montali's ruling doesn't shut down PG&E's effort or necessarily favor its rivals.
"One plan emerging as confirmable is a very acceptable outcome," Montali wrote. "And if both plans pass muster, the voters will make their choice or leave the court with the task of picking one of them." He directed the noteholders to file their plan by Oct. 17.
It's not the first time the company faced such a dilemma. PG&E's utility unit filed for bankruptcy in 2001, and in that case, creditors were paid in full and shareholders kept considerable value.
Regulators and creditors might want to maintain a capital structure of at least 50% equity that's typical for a utility, which would help PG&E sell new shares and debt. Political and public relations considerations could also emerge if pension funds, workers and individual shareholders with sympathetic stories weigh in.
"This would be devastating for my retirement," shareholder Andreas Krebs of San Francisco wrote to the judge a day before the ruling. "Please consider the average person that has invested their hard-earned retirement money into PG&E. I don't even know how to address the greed and gall of these creditors that would want to wipe out average people's savings in order to profit by taking over PG&E."
The utility previously said it has already lined up $34 billion in debt financing for its own reorganization plan. The company has also received more than $14 billion in equity commitments. It has blasted the plan by Elliott and Pimco, saying it would lead to an "unjustified windfall" of billions of dollars for creditors at the expense of shareholders and utility customers.
Noteholders, meanwhile, said their efforts wouldn't delay the bankruptcy case. They've joined forces with wildfire victims to pitch a plan that would pay out $25.5 billion to victims and their insurers. Their campaign to end PG&E's exclusive control was supported by the official committee of unsecured creditors, labor unions and fire victims.
The case is PG&E Corp. 19-bk-30088, U.S. Bankruptcy Court Northern District of California (San Francisco)
(Updates with bond reaction in the third paragraph, and a scenario in which shareholders keep value in the 15th.)
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