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Potential PG&E Bankruptcy Puts Power Purchase Agreement Counterparties On Notice

PG&E Corporation has announced that it and its subsidiary, Pacific Gas & Electric Company (PG&E), California’s largest electric utility, will file for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of California on or about Jan. 29, 2019. PG&E stated it will file bankruptcy in response to challenges relating to the catastrophic wildfires that occurred in Northern California in 2017 and 2018, which resulted in an estimated $30 billion in potential liability damages.

One critical issue in a PG&E bankruptcy is how PG&E intends to address its contracts with energy suppliers, including the solar and wind farms that sell energy to PG&E under long-term power purchase agreements (PPA). Bankruptcy courts across the U.S. have not been consistent when addressing whether Chapter 11 debtors can reject a PPA.

Many of PG&E’s PPAs were entered into nearly a decade ago and are priced three to five times higher than current renewable energy projects. For example, according to reports citing Credit Suisse, PG&E’s weighted average solar photovoltaic PPA price is about $140 per megawatt hour for those older contracts, compared to the $32.50 per megawatt hour for PPAs that PG&E contracts for currently. These higher priced contracts were entered into early in this decade when solar and wind power was much more expensive, and PG&E may seek to use the bankruptcy process to reject these contracts and (1) render a PPA counterparty as merely the holder of a general unsecured claim, for which the recovery on such a claim is uncertain, and/or (2) force a renegotiation of the contracts down to current market prices; which if successful, could result in reducing PG&E costs by over $2 billion per year.

Additionally, this could have significant ramifications for the owners and financiers of the projects – to the extent they are project financed – since those financings are dependent upon direct cash flows. 

Because bankruptcy courts are mixed on whether a Chapter 11 debtor may reject a PPA, it is critical for PPA counterparties to be active participants in a potential PG&E bankruptcy in order to preserve and enforce their rights so as to maximize the value of their PPAs and ultimate monetary recovery.

© 2019 BARNES & THORNBURG LLP

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Ralph Dudziak Corporate & Finance Attorney
Partner

Trusted adviser and legal counselor Ralph Dudziak advises on financing and other corporate transactions, with an emphasis on the renewable energy sector. Ralph cares deeply about the clients he serves and the results he cultivates and achieves.

Ralph’s experience includes project finance and development, renewable energy project construction and term lending, tax equity financings, back-leverage financings, additional forms of secured lending, credit warehouses and securitizations, private placements and leasing. He also represents a variety of other business clients in myriad...

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William Ewing Energy Industry Tax Attorney
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Bill Ewing advises and represents clients in a wide range of transactions with a particular focus on the energy industry. With over 25 years of experience, Bill understands the art of the deal and knows what it takes to close important transactions successfully in the most tax-advantageous manner — all while maximizing his client’s opportunity for success.

Co-chair of the firm’s Renewable Energy group, Bill represents clients in the energy industry in a variety of transactions, including partnership investments, sale/leaseback transactions, financings, acquisitions and sales of energy related assets. He also has a broad range of tax credit experience involving production and investment tax credits for solar, wind, geothermal, biomass and other energy-related projects, as well as in new markets and affordable housing tax credit transactions.

With significant knowledge of corporate, partnership, international and leasing transactions, Bill’s experience includes mergers, acquisitions and dispositions of business enterprises, spin-offs, complex partnership investments, and structuring for a number of U.S. inbound and outbound transactions. He also assists clients with tax audits and controversies.

A dedicated negotiator and bridge builder, Bill has closed deals that range in size and complexity from millions to hundreds of millions of dollars in development initiatives and other transactions. He makes a point of knowing what is important to each client and their constituents, and then designs a direct path to meeting their goals. He does not let tax issues get in the way of successfully closing a transaction.

As a testament to Bill’s personal dedication over many years of practice, Bill has maintained client relationships for decades. Fair, balanced and hard-working, clients and colleagues alike appreciate Bill’s judgement, innate business-mindedness, outstanding work product and in-depth knowledge of corporate and tax law.

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