Every year, once-great companies are knocked off of their pedestals. In 2018, it was the bankruptcy filing of Sears Holdings, once the greatest retail chain in the country. In 2017, we saw electronics chain RadioShack seek bankruptcy protection. The year before that, practically half of the coal industry went Chapter 11, even though, at the time, coal was still the leading source of electricity generation. Financial troubles can be tough to predict, and even well-known brands aren't safe.
PG&E spirals toward bankruptcy
This year's candidate to join the list is California-based electric utility PG&E (NYSE:PCG). On Jan. 14, the electric and gas utility filed paperwork with the state to announce its intent to seek bankruptcy protection on Jan. 29. The 15-day announcement before filing for bankruptcy protection is a requirement in California.
Check out the latest PG&E earnings call transcript.
How can such a predictably boring business model of producing electricity and selling it to residential and commercial customers go bust? The answer, as some pundits have opined, is climate change. A rash of deadly and/or costly fires in Northern California in 2017 and 2018 has led to lawsuits galore and a massive presumed liability for PG&E. Even with the company reporting this past Thursday that the California Department of Forestry and Fire Protection (Cal Fire) found it not liable for the Tubbs Fire in 2017, its potential liability for more than a dozen other fires in 2017, along with the 2018 Camp Fire, could push into the tens of billions of dollars.
Before announcing its intention to declare bankruptcy, PG&E had only about $1.5 billion in cash and cash equivalents on its balance sheet, and an insurance policy that might cover in the neighborhood of $3 billion in fire-related liabilities. Neither would prove to be anywhere near enough to cover the company's costs if Cal Fire found it liable.
PG&E's financial woes could turn California's "green" industries into rubble
While it might seem as if the ramifications from PG&E's financial woes are confined to it, its shareholders, and the unfortunate residents affected by these fires over the past two years, I can assure you there are almost certainly going to be other "casualties." In particular, Northern California's "green" industries could be nothing short of decimated as a result of PG&E's problems.
For starters, renewable-energy companies would be expected to take it on the chin. Aside from simply affording itself some liability leniency with a bankruptcy filing, PG&E should be able to break and then renegotiate its contracts with electricity suppliers. The result would be significantly lower electricity costs for PG&E.
The problem is that solar and wind producers benefit from the gap in costs that utilities such as PG&E pay versus the notably lower expenses solar and wind producers contend with. If PG&E is able to renegotiate its contracts, it would almost certainly mean less money for renewable-energy providers. These solar and wind providers often carry quite a bit of debt to get their renewable projects off the ground, meaning lower rates could doom their business model.
But it also would mean serious problems for California's other green industry: marijuana.
The Emerald Triangle, consisting of Humboldt, Mendocino, and Trinity counties, is the top cannabis-producing region in the entire country. That's meaningful for one reason: Cannabis plants require a lot of electricity to grow. These are plants that yield optimally in climate- and light-controlled environments, and that means growers often turn to the predictable yields of high-pressure sodium (HPS) bulbs, which are relatively inexpensive to buy but create a lot of heat and devour plenty of electricity. The heat created from these bulbs often requires the use of a cooling system, which further adds to electricity costs.
When PG&E's electric utility filed for bankruptcy protection in 2001 -- not to be confused with PG&E the holding company, which can you can buy stock in -- it worked out an agreement to charge its customers an above-average market rate for electricity to help repay its creditors. Now, facing a considerably larger liability, PG&E has suggested that electric rates could move substantially higher for its 16 million customers. For marijuana growers that could be a game-changer, or a game-ender.
California's legal pot industry is already facing the highest aggregate tax in the country, which in some locales could approach as much as 45%. Tacking on significantly higher electricity costs in Northern California would probably drive consumers back to the black market, costing the state valuable tax revenue dollars, and putting Northern-based growers out of business.
Perhaps the biggest problem here is that there's simply no precedent to an electric utility with liabilities of this magnitude. PG&E has stated that requests to trim trees and inspect its power grid would cost a mind-boggling $150 billion, and that such an idea isn't "technically or operationally feasible." Obviously, there is a solution somewhere between the extremes of "we promise not to do it again" and $150 billion in compliance costs. But not knowing where that liability will land puts PG&E and its customers, which includes businesses in the Northern California region, in limbo.