PG&E: The First Climate-Change Bankruptcy, Probably Not The Last (#GotBitcoin?)
The fast fall of PG&E after California’s wildfires is a jolt for companies considering the uncertain risks of a warming planet. PG&E: The First Climate-Change Bankruptcy, Probably Not The Last
PG&E Corp.’s bankruptcy could mark a business milestone: the first major corporate casualty of climate change. Few people expect it will be the last.
California’s largest utility was overwhelmed by rapid climatic changes as a prolonged drought dried out much of the state and decimated forests, dramatically increasing the risk of fire. On Monday, PG&E said it planned to file for Chapter 11 protection by month’s end, citing an estimated $30 billion in liabilities and 750 lawsuits from wildfires potentially caused by its power lines.
The company’s fall has been fast and steep. In October, its market value was $25 billion. This week, it was removed from the S&P 500 as its value tumbled below $4 billion and its shares fell to their lowest level since at least 1972.
The PG&E bankruptcy could be a wake-up call for corporations, forcing them to expand how they think about climate-related risks, management consultants and other experts said.
Previously, companies mainly worried over risks from new governmental regulations related to climate change, said Christophe Brognaux, a managing director at Boston Consulting Group. The PG&E case makes clear that companies also have to worry about sudden, and potentially unexpected, impacts to their core assets and liabilities, he added.
“Physical risks have only recently manifested themselves. This is a fairly new development,” said Bruce Usher, a professor at Columbia University’s business school who teaches a course on climate and finance. “If you are not already considering extreme weather and other climatic events as one of many risk factors affecting business today, you are not doing your job.”
J. Bennett Johnston, a former Democratic U.S. senator from Louisiana who has served on Chevron Corp.’s board of directors, said the potential for climate change to damage company assets and cause a mushrooming of liabilities is an emerging enterprise risk.
“The business community, by and large, has gotten the message,” he said. “You have to be pretty stupid not to see we’re in the midst of a climate crisis and it’s getting worse.”
Climate wasn’t the only factor that is pushing PG&E to a likely bankruptcy. State regulations also played a role. PG&E is required to provide electrical service to the thousands of people moving annually in the state’s forested areas. Moreover, an unusual California state law, known as “inverse condemnation,” made PG&E liable if its equipment started a fire, regardless of whether it was negligent.
PG&E capital spending plans are overseen by state regulators, who pressed the company to spend more on tree trimming but not, until a few months ago, on other fire-prevention measures such as early-warning weather stations and insulated wires.
PG&E’s former chief executive, Geisha Williams, told an investor conference in January 2018 that policies such as inverse condemnation could undermine the financial health of utilities and make them unable to carry out aggressive efforts to carbon emissions. “This policy isn’t affordable, and it isn’t sustainable. Ultimately, it carries grave implications for the industry’s financial health and our ability to attract the investment the state needs to fulfill its climate goals,” she said.
PG&E announced on Jan. 13 that Ms. Williams was stepping down as CEO as the political and financial fallout from the wildfires continued to grow.
In less than a decade, PG&E, which serves 16 million customers, saw the risk of catastrophic wildfires multiply greatly in its vast service area, which stretches from the Oregon border south to Bakersfield. Weather patterns that had been typical for Southern California—such as the hot, dry Santa Ana winds that sweep across the region in autumn, stoking fires—were now appearing hundreds of miles to the north.
“The Santa Ana fire condition is now a Northern California fire reality,” said Ken Pimlott, who retired last month as director of the California Department of Forestry and Fire Protection, or Cal Fire. “In a perfect world, we would like to see all [of PG&E’s] equipment upgraded, all of the vegetation removed from their lines. But I don’t know anybody overnight who is going to catch up.”
PG&E scrambled to reduce fire risks by shoring up power lines and trimming millions of trees. But the company’s equipment kept setting fires—about 1,550 between mid-2014 through 2017, or more than one a day, according to data it filed with the state.
PG&E has long accepted the science of climate change. It is one of several California utilities that, with prodding from state politicians, has been rapidly shifting to a cleaner energy future. It had $34.5 billion in long-term renewable energy contracts, according to a federal filing.
“Here was PG&E, the most ‘woke’ of utilities in terms of climate change,” said John Geesman, a former executive director and then member of the California Energy Commission. “Shouldn’t they have been adapting to climate change more rapidly than others?”
Other California utilities, such as Sempra Energy’s San Diego Gas Electric, began investing years ago in technology to shut off certain power lines during high fire-risk periods as well as changing the layout of their wires to lower the chance of inadvertently sparking fires during wind storms.
Extreme weather has led to a few bankruptcies in the past. In 2005, Entergy Inc. placed its New Orleans unit into bankruptcy after a liquidity crisis caused by the flooding that followed Hurricane Katrina. That was a much smaller utility and the flooding was a largely man-made problem of neglected levees and other infrastructure designed to protect the city.
Other companies have been severely impacted by climate regulations. The market value of German utilities E.ON SE and RWE AG plummeted in the early part of this decade as heavy government subsidies for renewable energy undermined their business models. More recently, General Electric Co. miscalculated how a global renewable energy push would reduce demand for giant natural-gas turbines, one of the many woes that have battered the conglomerate.
The global business community is recognizing the risks it faces from climate change. This week, a World Economic Forum survey of global business and thought leaders found extreme weather and other climate-related issues as top risks both by likelihood and impact.
Companies and their risk officers should be more aware that climate change could lead to unexpected and rapid changes, said Paula DiPerna, a senior advisor to CDP, an international nonprofit organization that presses companies to disclose their environmental impact.
“There is a general sense among policy makers, the general public and corporations that climate change is going to happen slowly,” she said. “On the contrary, climate change is an extremely unpredictable series of events. And in the face of that, companies should be very prepared.”
PG&E Files For Bankruptcy Following California Wildfires
PG&E Corp. filed for bankruptcy protection on Tuesday as it struggles with billions of dollars in potential liabilities from its role in sparking California wildfires, triggering one of the largest corporate-reorganization cases in years.
California’s biggest utility, which provides natural gas and electric service to 16 million people, sought protection under chapter 11 of the bankruptcy code. The process to restructure its debts is expected to be protracted, involving state and federal regulators, with wide-ranging implications for utility customers, fire victims, shareholders and wholesale power providers.
PG&E telegraphed earlier this month that it planned to file for bankruptcy, complying with a recently enacted state law that requires it to provide a 15-day notice before taking that step. It estimated its total debts at $51.689 billion and said its assets stood at $71.385 billion.
The company said earlier this month that it faces about 750 complaints on behalf of at least 5,600 fire victims who allege damages caused by PG&E equipment, and estimated that its fire-related liabilities could ultimately exceed $30 billion.
PG&E received some relief last week when state fire investigators said its equipment wasn’t responsible for the 2017 Tubbs Fire, which burned nearly 37,000 acres and killed 22 people. PG&E’s shares jumped on the news but were still down, through Monday, more than 80% since October.
Even though it was cleared in the Tubbs Fire, California investigators have determined that the utility’s power lines sparked 18 other wildfires in October 2017 that burned nearly 200,000 acres, destroyed 3,256 structures and killed 22 people. California’s legal framework renders utilities liable for damages from wildfires started by their equipment, even if they weren’t negligent.
Investigators are still working to determine whether PG&E’s equipment played a role in starting last November’s Camp Fire, which killed 86 people, making it the deadliest fire in state history. The company disclosed that one of its high-voltage transmission lines malfunctioned in the area about 15 minutes before the fire started.
Analysts have estimated that the Tubbs Fire finding could reduce PG&E’s potential liability costs by as much as $11 billion, but the remaining total could still threaten the company’s solvency. Hugh Wynne, an analyst at Sector & Sovereign Research, estimates that the company could face as much as $27 billion in liabilities even after being cleared in the Tubbs Fire investigation.
PG&E has said it “still faces extensive litigation, significant potential liabilities and a deteriorating financial situation, which was further impaired by the recent credit-agency downgrades to below investment grade.”
Following the chapter 11 filing, BlueMountain Capital Management LLC, a hedge fund that argued PG&E could avoid bankruptcy and continue to operate until its liability issues became clearer, said it was “deeply disappointed” that the board had chosen to go to bankruptcy court. It said it would propose a new slate of board members for the company by next month.
“Today’s filing is the latest example of how the board continues to fail the company, wildfire victims, customers, employees, creditors, shareholders and the people of California,” BlueMountain said in a statement. “We urge all stakeholders to support change at PG&E.”
The bankruptcy filing caps a tumultuous month for PG&E. Former Chief Executive Geisha Williams resigned just hours before the company announced its intent to seek bankruptcy protection, and Rothschild Vice Chairman Roger Kimmel resigned from the board shortly thereafter. Three executives within the electric division stepped down earlier this month.
John Simon, the company’s general counsel since 2017, is serving as interim CEO while the board searches for a new chief and several new directors to reflect an intensified focus on safety.
“Throughout this process, we are fully committed to enhancing our wildfire safety efforts, as well as helping restoration and rebuilding efforts across the communities impacted by the devastating Northern California wildfires,” Mr. Simon said Tuesday. “We also intend to work together with our customers, employees and other stakeholders to create a more sustainable foundation for the delivery of safe, reliable and affordable service in the years ahead.”
On Tuesday, PG&E said it has appointed James Mesterharm, a managing director at AlixPartners LLP, as its chief restructuring officer. Alix Partners is serving as PG&E’s restructuring adviser during the bankruptcy. Weil Gotshal & Manges LLP and Cravath Swaine & Moore LLP are serving as the company’s legal counsel, and Lazard is serving as its investment banker.
Regulated utilities rarely file for bankruptcy because they receive guaranteed returns. But PG&E’s Pacific Gas and Electric Co. utility unit sought that protection between 2001 and 2004 due to the California energy crisis, making it the only utility in the state to take that step.
The latest bankruptcy could affect fire victims’ ability to recoup losses through litigation claims that will likely be consolidated and handled in bankruptcy court. It also could affect electricity rates for customers, who already pay some of the highest prices in the country and could face double-digit increases in coming years.
The restructuring process could provide an opening for PG&E to amend or cancel some $34.5 billion in longstanding contracts to purchase wind and solar power, many of which were negotiated when market prices were much higher.
The fate of those contracts has raised concerns among wholesale power providers like Consolidated Edison Inc . and NextEra EnergyInc. that renegotiation could create uncertainty for future development.
“It could have a real ripple effect throughout the power industry, not just with respect to the existing contracts that are there,” said Luckey McDowell, a partner in Baker Botts’ restructuring group. “It could have a chilling effect in respect to new investment.”
California Gov. Gavin Newsom has also expressed worries about the potential cancellation of the contracts, which could affect the state’s ability to meet aggressive goals to cut greenhouse gas emissions and combat climate change.
“My administration will continue working to ensure that Californians have access to safe, reliable and affordable service, that victims and employees are treated fairly, and that California continues to make forward progress on our climate change goals,” he said in a statement Tuesday.
Earlier this month, NextEra petitioned the Federal Energy Regulatory Commission to assert jurisdiction over those contracts by ordering PG&E to seek the commission’s approval if it moves to renegotiate them during the bankruptcy process. The FERC ruled last week that it would review the matter alongside the bankruptcy judge.
With the layers of state and federal regulators, activist shareholders, angry debtholders and aggrieved Californians—some of whom have lost their homes or family members to wildfires—no one expects the bankruptcy process to be simple.
“There are some bankruptcy cases that get finished very quickly,” said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill. “This is just not one of those cases.”
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