Nothing in the business world can be taken for granted.
Sears Holdings, once the greatest retailer in the U.S., filed for bankruptcy protection in 2018 and is just a stone's throw away from possible liquidation. Washington Mutual, a savings and loan powerhouse, succumbed to the pressures of the financial crisis and sought bankruptcy protection in 2008. And WorldCom, once one of the largest telecommunications providers in the U.S., sought bankruptcy protection in 2002.
The list of brand-name companies who aren't or weren't assured of tomorrow is a mile long -- and it may soon have another addition: California gas and electric utility PG&E (NYSE:PCG).
Check out the latest PG&E earnings call transcript.
PG&Eek! Facing massive claims, a bankruptcy filing is imminent
PG&E, which had a market cap of around $35 billion as recently as August 2017 but has lost around 90% of its value, announced in a filing on Monday, Jan. 14, that it plans to file for bankruptcy protection on Jan. 29. What could bring such a presumably steady and cash flow-positive business model that relies on electricity and natural gas sales to its knees? The answer lies in culpability.
The recent Camp Fire in California, which resulted in the tragic deaths of 86 people and destroyed approximately 14,000 homes and more than 500 businesses, has led to $7 billion in claims filed against the company...so far.
According to various reports, it's believed that a power line came into contact with nearby trees, sparking the deadly California blaze. California's largest utility submitted a letter to regulators noting that it did, indeed, find a downed line in the area where the fire was believed to have begun with tree branches on it. Since maintaining the safe operating condition of transmission lines falls on PG&E, it's expected to be liable for these claims.
But that's not all. PG&E was also cited for wildfires in 2017 that caused $10 billion in damages and 44 deaths. Per the New York Times, state regulators found the company responsible for 17 of 21 fires in Northern California in 2017.
Combined, and when taking into account exacerbating factors, PG&E's liability for 2017's and 2018's California wildfires could reach $30 billion. In its Monday filing with regulators, it listed only $1.5 billion in cash and cash equivalents, and it has an insurance policy that would cover only a fraction of the proposed $30 billion in liabilities. Seeking bankruptcy protection will, presumably, give PG&E more flexibility as it contends with its existing debt obligations, as well as restitution to individual and business victims of these wildfires.
More people will be affected by PG&E's bankruptcy than you probably realize
Unforeseen events can and will happen. But this impending bankruptcy could wind up affecting far more people than anyone could have imagined.
To begin with, investors can probably expect to be wiped out, as is common when a public company files for bankruptcy protection. The thing is, utilities are often viewed as safe, defensive plays, meaning a lot of institutional firms and hedge funds had a stake in PG&E stock as of Sept. 30, 2018, according to the latest 13-F filings with the Securities and Exchange Commission. As of Sept. 30, 432.2 million shares of PG&E stock were held by institutional firms with $100 million or more in assets under management, with another 92.7 million shares held by hedge funds. In total, 31 institutional firms had PG&E as a top-10 holding as of Sept. 30.
According to aggregated 13-F filings via WhaleWisdom, some institutions stand to lose more than others. BlackRock, Vanguard Group, and State Street were holding $2.23 billion, $1.75 billion, and $1.13 billion worth of PG&E stock, respectively, at the end of the third quarter. Although not all Vanguard funds would be expected to own PG&E stock, Vanguard does have approximately 20 million clients. That's a lot of potential clients that could lose money as a result of PG&E's bankruptcy.
Additionally, the California Public Employees' Retirement System, better known as CalPERS, has 1.93 million members. Of its more than $350 billion in assets under management, CalPERS owned $74.1 million worth of PG&E stock as of Oct. 31, 2018. That'll likely be a total loss for the massive retirement account.
But investing losses are just the beginning.
Back in 2001, PG&E (the utility, not the holding company that you can buy stock in) declared bankruptcy after a drought in California led to little hydroelectric power generation. This forced the utility to purchase electricity at very high market rates (often from out-of-state providers) to meet demand, ultimately pushing the utility portion of the business into bankruptcy protection. The company needed to pay back more than $10 billion to creditors, and PG&E's customers were required to pay above-market rates for their electricity for years following the bankruptcy filing. With PG&E servicing roughly 16 million customers today, this same scenario appears likely to play out again.
And then there's the uncertainty about what exactly happens to the $30 billion in estimated liabilities tied to the 2017 and 2018 wildfires. One possible solution is that higher market rates will be passed along to PG&E's consumers, ultimately covering the utility's liabilities. Another involves the sale of parts of PG&E to rival companies, including its corporate headquarters and the company's natural gas operations. Then again, it may just wind up being the state and Californians as a whole that foot the bill. There really is no precedent for a utility bankruptcy with liabilities of this magnitude.
As the icing on the cake, California's solar and wind providers could be clobbered. PG&E's bankruptcy filing will allow the utility to renegotiate contracts with electricity suppliers, which might ultimately force solar and wind providers to accept lower rates. The solar and wind industry is reliant on these higher rates to generate positive cash flow.
So, just to summarize here:
- Potentially tens of millions of investors will lose money on what had seemed like a safe investment.
- Approximately 16 million PG&E customers could be on the hook for above-market rates for a long time to come.
- It's unclear exactly what entity will cover the estimated $30 billion in liabilities.
- California's renewable-energy industry might take it on the chin.
What a mess.