Utility Seeks Bankruptcy Protection Over California Fires
Monday, January 14, 2019
Credit: Associated Press
The nation's largest utility said Monday it is filing for Chapter 11 bankruptcy because it faces at least $30 billion in potential damages from lawsuits over the catastrophic wildfires in California in 2017 and 2018 that killed scores of people and destroyed thousands of homes.
The move by Pacific Gas & Electric Corp., expected by the end of the month, would be the biggest bankruptcy by a utility in U.S. history, legal experts said.
It would allow PG&E to hold off creditors and continue providing electricity and natural gas without interruption to its 16 million customers in Northern and central California while it tries to put its finances in order.
The filing would not make the lawsuits disappear, but would result in all wildfire claims being consolidated into a single proceeding before a bankruptcy judge, not a jury. That could shield the company from excessive jury verdicts and buy time by putting a hold on the claims.
Chapter 11 reorganization represents "the only viable option to address the company's responsibilities to its stakeholders," Richard Kelly, chairman of PG&E's board of directors, said in a statement.
"The Chapter 11 process allows us to work with these many constituents in one court-supervised forum to comprehensively address our potential liabilities and to implement appropriate changes."
State officials are investigating whether the utility's equipment sparked the deadliest, most destructive wildfire in California history, a November Northern California blaze that killed at least 86 people and burned down 15,000 homes.
State investigators have also blamed PG&E power lines for some fires in October 2017. Authorities are also looking into the cause of a blaze that destroyed thousands of homes and killed 22 people in Santa Rosa last year.
California law requires utilities to pay damages for wildfires if their equipment caused the blazes — even if the utilities weren't negligent through, say, inadequate maintenance.
PG&E, which is the nation's largest utility by revenue and is based in San Francisco, said it is giving the required 15 days' notice that it plans to file for bankruptcy protection.
It said it will continue working with regulators and stakeholders to consider how it can safely provide energy "in an environment that continues to be challenged by climate change."
The announcement follows the resignation of chief executive Geisha Williams a day earlier. She leaves with a $2.5 million severance payout, a spokesman told the Mercury News of San Jose.
In a Monday filing with the Securities and Exchange Commission, the company said the liabilities it faces from 2017 and 2018 wildfires could exceed $30 billion, not including punitive damages, fines and penalties.
The largest bankruptcy filing on record by a utility was Energy Future Holdings Corp. in 2014, which had $49.7 billion in liabilities in today's dollars, according to an analysis by Kevin Kelly, director of publications at S&P Global.
Veteran New York bankruptcy lawyer H. Jeffrey Schwartz said PG&E's bankruptcy should prove to be the biggest yet, since it had about $50 billion in liabilities at the end of 2017. That does not include claims from 2018 wildfires.
He said the utility has no other way of getting out from under the mountain of legal claims.
"The liability is too great. It's too many claims, the aggregate amount is too great, and it looks at first blush to be indefensible because PG&E knew of this risk and didn't clear the line areas as it should have," Schwartz said.
He said he expects shareholders to bear the brunt of the restructuring. Bankruptcy court has no say over the rates utility customers pay; those are decided by state regulators and politicians.
As for the lawsuits, PG&E will negotiate with the plaintiffs and its other creditors a reorganization plan based on how much the utility is able to pay, said Hugh Wynne of Sovereign Research, an investment research firm.
"You avoid a situation where some jury in California thinks PG&E is responsible for this fire, so we should hit them up for all these damages and let them sort out how they pay for it," Wynne said.
A bankruptcy also would allow PG&E to raise cash by selling assets — such as its gas business and hydropower plants — more easily, he said.
PG&E spent millions in an 11th-hour lobbying effort at the end of the California legislative session in August in a failed attempt to change the law to reduce its liability in wildfires.
Before last year's disastrous fire in Northern California's Butte County, PG&E's stock stood at $47.80. But in early Monday trading it tumbled $8.48 to $9.11, its lowest level in more than 16 years. Wall Street last week slashed PG&E's credit rating to junk status.
PG&E also filed for Chapter 11 in 2001 amid rising electricity prices during California's energy crisis.
California's new governor, Democrat Gavin Newsom, said in a statement that he will make sure customers continue to receive affordable energy and that wildfire victims are treated fairly.
The Natural Resources Defense Council warned that bankruptcy could threaten billions in funding for PG&E's clean energy initiatives, which are key to California's environmental goals. PG&E is the state's largest investor in energy efficiency and electric vehicle infrastructure, said the NRDC's Ralph Cavanagh.
"California needs healthy utilities with access to capital to be able to meet its environmental goals and policies. It's essential," said Travis Miller, a strategist at Morningstar Inc.
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