PG&E Bankruptcy Yields $700 Million Fee Bonanza

A collection of lawyers, investment bankers and other financial professionals are set to collect the last installment of $700 million in compensation for their involvement in PG&E's 17-month-long bankruptcy proceedings. The accumulated fees make this one of the costliest bankruptcy cases in U.S. history.

U.S. Bankruptcy Court Judge Dennis Montali this week approved most of the legal fees billed by the 32 firms involved in the utility's second run through Chapter 11 bankruptcy protection, which wrapped up in June.

KQED’s review of filings with the court found that New York-based Cravath, Swaine & Moore, one of three principal law firms representing PG&E in the bankruptcy, racked up the highest bill: $115.7 million in legal fees and $27.5 million in expenses.

A fee examiner appointed by the court to oversee costs, reduced the firm's fees by about 7%, according to court filings, in part by challenging Cravath's attempt to bill first-year associates not yet admitted to the bar at the same rate as more experienced attorneys.

The second-largest haul went to AP Services, an affiliate of consulting firm AlixPartners. One of the firm's managing directors served as PG&E's chief restructuring officer throughout the bankruptcy. In all, the firm billed $91.1 million, with Montali approving an additional $8 million "success fee" in October.

New York-based law firm Weil, Gotshal & Manges, whose lawyers charged as much as $1,695 an hour and played the most visible role representing PG&E in court proceedings, received $52.8 million in fees and expenses after agreeing to a 4.25% reduction, filings show.

Yet another New York-based law firm, Simpson Thacher, which represented current and former PG&E board members, will walk away with nearly $12 million, after agreeing to a $567,000 reduction.

The dominance of New York firms in the case resulted in disputes over travel costs early in the bankruptcy, as some lawyers billed as much as $900 a night for San Francisco hotel rooms, and in one instance, expensed a nearly $4,000 round-trip plane ticket, all while billing hourly as they traveled. In late 2019, Montali approved protocols pushed by the fee examiner to limit how much firms could charge for non-working travel.

PG&E entered into bankruptcy protection early last year, citing liabilities from wildfires in 2017 and 2018. The voluntary Chapter 11 filing came weeks after PG&E equipment sparked California's deadliest blaze — the Camp Fire — which killed 85 people and destroyed much of the town of Paradise in Northern California. Under the bankruptcy code, as the company filing for Chapter 11, PG&E is responsible not just for its own legal costs, but also for those of the groups it owes money to.

That includes BakerHostetler, a law firm that negotiated a controversial multibillion-dollar deal to compensate victims of 2015, 2017 and 2018 California fires. In the process, the firm made almost $58 million, filings show. A portion of that went toward preparing for a trial aimed at estimating PG&E's total fire liabilities. But attorneys ended up settling with PG&E for a confidential sum just as the trial was set to start. BakerHostetler's financial adviser, Lincoln Partners, netted an additional $15.6 million in fees and expenses.

Meanwhile, preliminary payments of $25,000 or less started to slowly trickle out last month to the roughly 80,000 PG&E fire survivors.

Through his lawyer, fee examiner Bruce Markell declined to comment for this article, citing the confidentiality of negotiations. About half of the firms seeking fees have had their applications approved by the court, with the rest expected in the coming year.

Under the complex rules of utility finance, PG&E's revenue comes from the rates its customers pay. But technically, the cost of the bankruptcy will come from elsewhere.

"The shareholders had to pay," said Mark Toney, executive director of The Utility Reform Network (TURN). "The good news is PG&E ratepayers were not charged for any of this."

Toney said that's a departure from PG&E's first bankruptcy, which was an outgrowth of the state's 2000-01 energy crisis. Back then, ratepayers shouldered more than $400 million in fees collected by the legal consultants involved.

PG&E spokesperson Lynsey Paulo justified the cost of this latest bankruptcy by saying it resulted in the company reaching several deals with groups including fire victims, local governments and holders of insurance claims.

Looking forward, "The plan positions PG&E to make tens of billions of dollars of investments in system hardening and wildfire risk mitigation in the coming years," Paulo said.

For the time being, PG&E will forego paying a shareholder dividend and instead direct funds to improving safety through infrastructure upgrades and repaying corporate debt, she said.

But the stability of PG&E's post-bankruptcy financial footing is up for debate. In its most recent quarterly earnings report, the company disclosed $2.7 billion in bankruptcy and legal costs just for the first nine months of 2020. And during the bankruptcy, PG&E substantially increased its debt load from $21.5 billion to $38 billion. It also raised $9 billion in equity in the largest equity offering in financial history.

"It doesn't have to deal with defending itself in court against all the lawsuits brought by fire survivors. But they essentially dealt with that problem by borrowing money to pay for it," said Jared Ellias, a UC Hastings bankruptcy law professor. "Now they're going to have to pay interest on that debt. That leaves them in a vulnerable position if there's another crisis."

On the other hand, a wildfire insurance fund for California's investor-owned utilities, created by state lawmakers last summer, may help insulate PG&E from future disasters, said Ellias. Ratepayers and shareholders are splitting the cost of PG&E's entry into that fund.

Ultimately though, the bankruptcy didn't markedly improve PG&E's financial condition, Ellias noted.

"One could have envisioned PG&E raising money in a different way," he said.