PG&E Had Rescue Options. Here’s Why It Chose Bankruptcy Instead

(Bloomberg) -- PG&E Corp.'s descent into bankruptcy came even though the company isn't broke.

Its Pacific Gas & Electric utility serves 16 million people -- more than 40 percent of California's population -- and pulls in $17 billion in revenue per year. The steady flow of monthly customer payments, plus a regulated rate of return on its power lines and poles, gives PG&E the kind of stable, predictable income many businesses can only envy. It has about $240 million in cash on hand, though that number has been quickly falling.

The company also received financing proposals from investment firms including Elliott Management Corp. and Citadel LLC that could have kept it out of bankruptcy court, at least temporarily. Yet PG&E pushed forward with its plan announced two weeks ago to seek Chapter 11 protection, culminating with a filing Tuesday that was the biggest ever for a U.S. utility.

Here are some of the reasons for the bankruptcy:

1. Fires, lawsuits and the fear of more to come

For two consecutive years, PG&E's power lines have been blamed for sparking deadly wildfires during windstorms. More than 5,600 people have sued the San Francisco-based company over the blazes, and the utility expects “thousands” more. PG&E estimates its liability at $30 billion, even though California fire investigators last week cleared the company of starting the deadliest 2017 fire. A bankruptcy judge could sort those lawsuits and determine who bears the cost, handling all of the claims in one venue.

2. Help would be too little, too late

California politicians last year threw PG&E a lifeline, passing a law that will allow the company to use bonds -- backed by customer bills -- to pay off wildfire lawsuits from 2017. But the law doesn't apply to 2018 fires, so the company can't use it for lawsuits arising from November's Camp Fire, the most destructive in state history.

After the Camp Fire, one state legislator drafted a bill that would have extended the 2017 legislation to cover that blaze, but he never formally introduced it. And PG&E, in its bankruptcy filings, argues that the bond process for 2017 is too slow, forcing the company to pay settlement costs upfront before asking state regulators for permission to issue the debt.

3. California's liability rules

PG&E spent most of 2018 pushing California legislators to change the state's liability rules concerning wildfires -- to no avail. Under a doctrine called “inverse condemnation,” utilities can be held responsible for wildfire damage linked to their equipment, even if they followed all the state's safety rules. The company, in its filings Tuesday, blamed inverse condemnation for much of its predicament.

Some observers see PG&E's bankruptcy as a way to force Sacramento to change the system and eliminate a long-term threat to the state's utilities. But Steven Malnight, the utility's senior vice president for energy supply and policy, said Tuesday that the bankruptcy filing was no ploy. “The board went through a very rigorous process to assess the options available to the company,” he said in an interview. “This is not something we'd undertake lightly.”

4. Rescue packages wouldn't help long term

While PG&E received last-minute rescue packages from at least two groups, the company said in its bankruptcy filing that alternate financing wouldn't fix its underlying problems.

“After a comprehensive review, the boards of both PG&E Corp. and the utility, and management determined that temporarily extending PG&E's liquidity runway was not in the best interests of its economic stakeholders and would not address and, indeed would merely postpone addressing, the fundamental issues facing PG&E and jeopardize its long-term viability,” said Chief Financial Officer Jason Wells.

5. It's worse than it looks

PG&E's filings Tuesday show $71.4 billion in assets and $51.7 billion in liabilities. But the company's financial condition is deteriorating. When PG&E on Jan. 14 warned that it would file for bankruptcy, it had about $1.1 billion cash on hand. In just two weeks, that plunged to $240 million, as the company's business partners demanded more collateral, pre-payment or accelerated payment terms. And credit downgrades early this month effectively closed off access to capital markets. The company forecasts that capital spending will outstrip incoming cash from operations by $1.6 billion this year as well as in 2020.

“As we looked at the substantial liabilities the company could face, the liabilities from all the fires, and we looked at the deterioration of the financial status of the company with the downgrades we've seen, we really could not risk the disruption to our operations,” Malnight said.

To contact the reporter on this story: David R. Baker in San Francisco at dbaker116@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Kara Wetzel, Margot Habiby

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