A series of devastating wildfires that killed more than 100 people and scorched hundreds of thousands of acres in California over the course of two years just brought one of America’s largest utilities to its knees.
PG&E Corp. and its Pacific Gas and Electric Co. utility filed for Chapter 11 bankruptcy in San Francisco as investigators probe whether its equipment ignited the deadliest fire in state history. The San Francisco-based company listed US$51.7 billion in total debts and US$71.4 billion in assets. A Chapter 11 filing allows a company to keep operating while it works out a plan to turn the business around and pay off creditors.
The only time the company has ever faced such dire financial straits was during the 2001 energy crisis
California’s wildfires have in the past saddled utilities with millions of dollars in damages, but never have the blazes exacted such a massive financial toll from a company — creating one of the country’s largest utility bankruptcies of all time. Since November’s Camp Fire, which destroyed the town of Paradise, PG&E has seen about three-fourths of its market value wiped out, its chief executive officer leave, its bonds plunge to junk status and estimates of its fire liabilities swell to more than US$30 billion.
“We did not make this decision lightly, as we understand that millions of our customers rely on us and will have questions,” PG&E’s interim chief executive officer, John R. Simon, said in a letter to customers. “The power and gas will stay on. We will continue to provide you with reliable electric and natural gas service, and that will not change as a result of this process. To be very clear, we are not ‘going out of business.”‘
The only time the company has ever faced such dire financial straits was during the 2001 energy crisis, when it was forced to place its utility unit in bankruptcy protection. In a twist, the same judge who oversaw the company’s last Chapter 11 filing, Dennis Montali, has been assigned to the latest.
The utility giant’s financial crisis had some of the biggest names in the investment world working up last-minute financing packages that they said would have rescued the company from insolvency. A group including Paul Singer’s Elliott Management Corp. was said to have sent a proposal to PG&E backed by US$4 billion of bonds that could convert into shares. At least one other group that included Ken Griffin’s Citadel LLC and Leon Black’s Apollo Global Management LLC was said to be pitching a rival plan.
The utility’s top creditors include Bank of New York Mellon Corp., Citibank, Mizuho and Bank of America Corp. Bank of New York Mellon holds the largest unsecured claim, totalling US$3 billion, court filings show. The first meeting of creditors has been set for Feb. 26.
PG&E’s demise serves to underscore the increasing vulnerability utilities face to natural disasters such as wildfires and hurricanes that are becoming more extreme. That’s especially the case in California, where state law holds utilities liable for damages even if they aren’t found to be negligent.
While the company’s been cleared of fault for the deadliest of the wildfires that devastated California’s wine country in 2017, investigators have tied PG&E’s equipment to more than a dozen of the other fires. They’re looking at PG&E’s power lines as a possible ignition source for the Camp Fire, which killed 86. The company said on Tuesday that it “continues to believe that the Chapter 11 process will facilitate the orderly, fair and expeditious resolution of the liabilities that have arisen and will continue to arise” from the fires.
State officials including Governor Gavin Newsom had said it would be in the state’s best interest to keep the utility healthy and financially viable. PG&E is considered a linchpin in helping achieve California’s ambitious climate goal of getting all its electricity from carbon-free sources by 2045. At the same time, Newsom chose not to take measures drastic enough to avoid a bankruptcy filing, and regulators actually began a process to evaluate whether to break up or take over the utility.
A bankruptcy will probably result in higher bills for customers because it will be more expensive for PG&E to borrow the money it needs to make infrastructure investments it needs to keep the lights on. The company supplies natural gas and electricity to about 16 million people in Northern and Central California.
As part of the bankruptcy, PG&E is seeking approval from the court to enter into an agreement for US$5.5 billion in debtor-in-possession financing. That would free up the capital it needs to keep operations going through the Chapter 11 process. It listed J.P. Morgan Chase & Co., Bank of America, Barclays Plc, Citigroup Inc., BNP Paribas SA, Credit Suisse Group AG, Goldman Sachs, MUFG Union Bank and Wells Fargo & Co. acting as joint lead arrangers.
“With utilities, bankruptcies take multiple years,” Kit Konolige, an analyst for Bloomberg Intelligence, said in an interview before the filing. “There is no such thing as a quick utility bankruptcy. And it creates a lot of uncertainty for everybody involved.”
Setting the stage for a potential battle over power contracts, PG&E has asked the judge to rule that the court has the exclusive right to reject existing power purchase agreements. NextEra Energy Inc. is fighting to keep its contracts with PG&E from being canceled as part of the bankruptcy and took up the issue with the Federal Energy Regulatory Commission last week. The commission ruled in response that it shares “concurrent jursidiction” with bankruptcy courts.
Here are other highlights from the bankruptcy filing:
PG&E says it intends to pay suppliers in full under “normal terms.”Weil, Gotshal & Manges LLP and Cravath, Swaine & Moore LLP are PG&E’s legal counsel.Lazard is its investment banker and AlixPartners LLP is the restructuring adviser.James A. Mesterharm, a managing director at AlixPartners, will serve as PG&E’s chief restructuring officer. John Boken, also a managing director at AlixPartners, will be deputy chief restructuring officer.The first-day hearing on the bankruptcy hasn’t yet been scheduled, according to a website PG&E set up for the case. PG&E listed US$61.2 million in compensation obligations; US$970,000 in short-term incentive and retention payments and US$35.9 million in overall incentive and retention payouts.
With assistance from Virginia Van Natta
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