California’s largest 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.
Vulnerabilities in PG&E’s infrastructure combined with the impact of climate change contributed to hundreds of wildfires in California, including the deadly Camp Fire in 2018. Here’s a look at upgrades to the utility giant’s power grid that might have prevented these blazes. Photo: Reuters
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.
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.”