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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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About this Author

Ralph Dudziak, Barnes Thornburg Law Firm, Chicago, Corporate, Energy and Finance Law Attorney
Partner

Ralph Dudziak is a partner in the Chicago office of Barnes & Thornburg LLP. As a transactional attorney in the firm’s Corporate Department, Mr. Dudziak concentrates a significant portion of his practice in the energy sector on project finance and development, renewable energy project construction and term lending, tax equity financings, back-leverage financings, other forms of secured lending, credit warehouses and securitizations, private placements, and leasing.

Mr. Dudziak’s wide-ranging experience includes advising a variety of clients...

312-214-5618
William Ewing, Barnes Thornburg Law Firm, Atlanta, Corporate and Energy Law Attorney
Partner

William P. Ewing is a partner in the Atlanta office of Barnes & Thornburg LLP, where he is co-chair of the firm’s Renewable Energy Practice Group and a member of the Corporate Department.

Mr. Ewing represents clients in the energy industry in a wide variety of transactions, including in partnership investments, financings, leasing transactions, acquisitions and sales of energy related assets. He has represented investors in a range of tax credit transactions, including renewable energy, refined coal, synthetic fuel, coke, new markets and affordable housing tax credit transactions.

Mr. Ewing has significant experience with corporate, partnership, international, tax credit and leasing tax issues. His corporate practice 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. Mr. Ewing also assists businesses in the tax audit and controversy area.

Mr. Ewing received his B.S. in business administration/accounting from Washington and Lee University in 1986. He earned his J.D. in 1989 from the University of South Carolina School of Law, and his LL.M. in Taxation in 1992 from the University of Florida College of Law.

Mr. Ewing is a member of the American Bar Association (Tax Law Section), the International Fiscal Association and the Atlanta Tax Forum. He is admitted to practice in the states of Georgia, South Carolina and Florida.

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