Pacific Gas & Electric has finally put a dollar figure on how much liability it could face for the Northern California fires started by its power lines last October: $2.5 billion.
In an 8-K filed Thursday with the U.S. Securities and Exchange Commission, PG&E said that it intends “to record an estimated pre-tax charge in the amount of $2.5 billion for the quarter ending June 30, 2018.” This charge is more than the $1.6 billion the utility earned in 2017, and it’s a lowball figure — PG&E wrote that the estimate “corresponds to the lower end of the range of PG&E Corporation and the Utility’s reasonably estimated losses.”
Thursday isn’t the first time PG&E has warned investors of the financial risks it faces from liability for the wildfires that devastated Northern California's wine country last year, killing 44 people and leading to more than $3 billion in insured property losses. But it is the first time it has put a dollar figure on its potential liability.
The filing also noted that, if PG&E was to be found liable for some of the more than $10 billion in estimated insured losses caused by the Northern California wildfires, "the amount of the liability could significantly exceed the approximately $10 billion in estimated insured property losses," and far more than its estimated $840 million in insurance.
Thursday’s filing added hard evidence to the talk this week that PG&E may be facing bankruptcy as a result of its liability for last year’s fires. State Sen. Jerry Hill told CBS Sacramento this week that PG&E executives had been at the Capitol, “talking about the sky is falling, that they’re going to go bankrupt and what are we going to do, and they’re creating a lot of fear in the Capitol.”
Thursday's filing addressed that subject in a roundabout way, noting that it could take years for PG&E to seek cost recovery for these losses, and that it "may be unable to fully recover costs in excess of insurance through regulatory mechanisms, if at all, and, even if such recovery is possible, it could take a number of years to resolve and a number of years to collect. PG&E Corporation and the Utility have considered actions that might be taken to attempt to address liquidity needs of the business in such circumstances, but the inability to recover costs in excess of insurance through increases in rates and by collecting such rates in a timely manner could have a material adverse effect on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, capital markets access and cash flows."
PG&E’s filing comes in response to a June 11 report from the California Department of Forestry and Fire Protection (Cal Fire), which found that the utility’s power lines were at fault for 12 fires that burned more than 150,000 acres and killed nine people.
Of the 12 fires, Cal Fire referred investigations for eight of them — the Sulphur, Blue, Norrbom, Partrick, Pythian, Adobe, Pocket and Atlas fires — to the appropriate county District Attorney’s offices for review, “due to evidence of alleged violations of state law” for failing to clear brush around its lines and properly maintain its power equipment.
PG&E noted in its 8-K that it has not reviewed the evidence Cal Fire has referred to county DAs, and that none have yet filed any charges. But under generally accepted accounting principles (GAAP), it is required to "evaluate which potential liabilities are probable and the related range of reasonably estimated losses, and record a charge that is the amount within the range that is a better estimate than any other amount or the lower end of the range, if there is no better estimate" — the latter option it has chosen with the $2.5 billion figure.
PG&E's estimate also takes into account “the current state of the law on inverse condemnation.” This is an important addition, as it refers to an unusual set of legal precedents in California state law that can hold utilities liable for property damages and attorneys’ fees if its equipment was a substantial cause of a fire, even if it followed established inspection and safety rules. PG&E has been working with state lawmakers and Gov. Jerry Brown on legislation that could reduce its financial exposure under this legal doctrine.
PG&E’s $2.5 billion figure ”does not include any amounts for potential penalties or fines that may be imposed by governmental entities.” It also doesn’t include any potential liabilities associated with other major fires last year, including the Tubbs fire, which killed 22 people and destroyed more than 4,000 homes in Santa Rosa and greater Sonoma County, as Cal Fire hasn’t released findings from those investigations yet.
The utility has lost more than $14 billion in market valuation since the state investigations were first reported in November, with wild swings in share price following each new finding — or rumored finding — in the investigation. It faces hundreds of lawsuits on behalf of residents burned out by the fires in its territory, as well as lawsuits from the counties of Sonoma, Lake, Mendocino and Napa.
PG&E has been repeatedly penalized for safety violations, most notably its $1.6 billion penalty and criminal conviction for the 2010 San Bruno gas pipeline explosion, which killed eight people and destroyed a residential neighborhood. It has also paid out hundreds of millions of dollars in settlements over its role in the 2015 Butte Fire, which burned more than 700,000 acres and destroyed 500 homes in Calaveras County.
State lawmakers have reportedly been working with the utility on potential bailout packages, fearing a repeat of the harm caused by PG&E's bankruptcy filing in the wake of the 2001 California energy crisis. The utility ended up paying its creditors $10.2 billion through its emergence from bankruptcy in 2004, largely paid for by increased rates imposed on its customers.