Monday, February 18, 2019

PG&E Says It Will File Bankruptcy, as CEO Steps Down

By Hudson Sangree

PG&E Corp. and its subsidiary Pacific Gas and Electric will file for federal bankruptcy protection by Jan. 29, the companies announced Monday, capping a tumultuous week in which PG&E’s stock price plummeted and its credit rating was downgraded to junk status by two major ratings firm.

A day earlier, PG&E said CEO Geisha Williams would be stepping down and leaving the company. Her tenure with the company has coincided with major disasters, including the 2010 San Bruno gas line explosion as a senior executive, and the 2017 wine country fires and 2018 Camp Fire, the deadliest in state history.

Together, those three events killed 104 people, destroyed 28,000 structures and burned approximately 400,000 acres. PG&E was found criminally liable for the San Bruno explosion, which wiped out a suburban San Francisco neighborhood. The Tubbs Fire, which burned down the northern part of Santa Rosa, Calif., in October 2017 and the Camp Fire, which leveled the town of Paradise in November 2018, remain under investigation, though PG&E equipment is a suspected cause of both.

In a U.S. Securities and Exchange Commission filing Monday, PG&E said it faces $30 billion in liability for the last two fire seasons, not including punitive damages, fines or penalties, which could add up to billions more. As of Friday, 750 lawsuits had been filed against PG&E for the Camp Fire and the wine country fires on behalf of a total of 5,600 plaintiffs, the company said. Eleven of the lawsuits are seeking class-action status, it said.

PG&E said its liability insurance and liquid assets would cover only a small fraction of those claims, and that bankruptcy was its only recourse.

“Following a comprehensive review with the assistance of our outside advisers, the PG&E board and management team have determined that initiating a Chapter 11 reorganization for both the utility and PG&E Corp. represents the only viable option to address the company’s responsibilities to its stakeholders,” PG&E Chairman Richard C. Kelly said in a news release.

A recent state law requires the company to give a 15-day advance notice of its intent to file for bankruptcy.

PG&E, founded 114 years ago in San Francisco, announced it was seeking bankruptcy protection this week as it faces $30 billion in liability for deadly wildfires in 2017 and 2018.

Ensuring Operations

PG&E said it expects to continue to be able to provide uninterrupted electric and gas service to its 16 million customers across 70,000 square miles of Northern and Central California. PG&E’s service territory stretches from near the Oregon border in the north to Santa Barbara County in the south, and from the coast to the Sierra Nevada mountains.

The company told the SEC, however, that it does not plan to pay the $21.6 million in interest due Tuesday on its outstanding senior notes, although it had 30 days to make the interest payment before triggering a default.

It said it knows that parties it does business with will worry about getting paid too, but it expects to meet its obligations. (See related story, PG&E Credit Woes Spread, Worrying CAISO Members.)

“PG&E expects that the decision to seek relief under Chapter 11 will raise concerns among its constituencies, including customers, vendors, suppliers and employees, and may lead to a contraction in trade credit and the departure of key employees,” it said. “PG&E has taken steps, however, to mitigate the impact of these potential developments.”

That includes seeking debtor-in-possession (DIP) financing available to companies in bankruptcy.

“PG&E expects to have approximately $5.5 billion of committed DIP financing at the time it files for relief under Chapter 11 on or about Jan. 29, 2019, and has received highly confident letters from a number of major banks,” the company wrote. “The DIP financing will provide PG&E with sufficient liquidity to fund its ongoing operations, including its ability to provide safe service to customers.”

California’s new governor, Gavin Newsom, issued a press release Monday saying he’d been monitoring the situation closely.

“When I took office one week ago today, I immediately instructed my team to meet with the California Public Utilities Commission, CAISO, PG&E and labor unions representing the workers who work for PG&E,” Newsom said. “My staff and I have been in constant contact throughout the week and over the weekend with these stakeholders and regulators. Everyone’s immediate focus is, rightfully, on ensuring Californians have continuous, reliable and safe electric and gas service.

“While PG&E announced its intent to file bankruptcy today, the company should continue to honor promises made to energy suppliers and to our community,” he said. “Throughout the months ahead, I will be working with the legislature and all stakeholders on a solution that ensures consumers have access to safe, affordable and reliable service, fire victims are treated fairly, and California can continue to make progress toward our climate goals.”

‘Very Short Runway’

Some said it isn’t too late for California lawmakers to head off bankruptcy.

ClearView Energy Partners, a research firm based in D.C., said the State Legislature could pass a bill that extends provisions of last year’s Senate Bill 901. That measure allows the CPUC to apply a financial stress test for 2017 wildfire liability to determine how much a utility can afford to pay without harming its customers or destroying its business.

Lawmakers could extend that provision to cover 2018 fires, giving PG&E another route to remain solvent, ClearView said in an email to its clients.

“The 15-day notice offers a very short runway for lawmakers to act before Chapter 11 proceedings could begin,” the firm said. “We have observed lawmakers in California and other states move quickly when faced with an immediate concern. Still, the high degree of controversy and public outcry stemming from wildfire damages and perceived blame assigned to PG&E likely creates headwinds in the legislative process. Each day that passes without a legislative proposal could diminish the prospects for a legislative ‘fix.’”

Even after Jan. 29, it may be possible to stop the bankruptcy proceedings, ClearView said.

“We are not bankruptcy experts, but our state sources indicate that the initial steps in the Chapter 11 process are reversible. In other words, if state lawmakers do enact a law after January to change liability risk from wildfires that occurred last calendar year, PG&E could halt the proceeding. Still, we believe lawmakers need to take some action by the end of the month.”

SB 901 was a compromise measure put together hastily at the end of last year’s legislative session. (See California Wildfire Bill Goes to Governor.) Earlier, then-Gov. Jerry Brown called for lawmakers to overturn state court precedent that holds utilities strictly liable for all wildfire damage caused by their equipment, regardless of negligence. He was worried that PG&E might declare bankruptcy after the 2017 fires, undermining its support of clean energy and Brown’s ambitious goals related to climate change.

He may have had a point. Last week one of the nation’s largest solar arrays, the Topaz Solar Farm in Central California, had its credit rating downgraded to junk status because it had signed a 25-year power purchase agreement with PG&E. S&P Global Ratings said Topaz, owned by Warren Buffett’s Berkshire Hathaway Energy, could be harmed by PG&E’s inability to pay.

On Monday, the Natural Resources Defense Council said PG&E’s bankruptcy could spell bad news for California’s goals, enshrined in last year’s SB 100, of relying on 60% renewable energy by 2030 and achieving zero-carbon status by 2045.

“As NRDC warned months ago, potential adverse consequences include a loss of state oversight and damage to significant clean energy programs critical to reaching California’s climate goals,” including PG&E’s planned investments in electric vehicle infrastructure, NRDC said in a news release. “At risk could be billions of dollars of funding for PG&E’s nation-leading clean energy initiatives, which are designed to help fight the effects of climate change like these tragic wildfires.”

The legislature reconvened Jan. 7. Lawmakers, some of whom have backed away from supporting PG&E, have yet to offer any bills that could help the utility.

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