California utility Pacific Gas & Electric (PCG) could be the first corporate casualty of Climate Change.
To explain, many people blame Pacific Gas & Electric (NYSE: PCG); or PG&E, for starting the fatal Camp Fire in November 2018. Therefore, PG&E could be liable for the deaths of over 80 people in and around Paradise, California.
The popular theory is that sparks from PG&E power-lines; or equipment, started the Camp Fire. However, Climate Change could be the real cause of the mega fire.
To clarify many climatologists believe high temperatures and drought caused by Climate Change dried out vegetation in Northern California. That provided vast amounts of dry wood, grass, and leaves that fueled the Camp Fire.
Pacific Gas & Electric (PCG) is being for a fire caused by Climate Change
Notably, PG&E has operated power-lines in California for up to a century without starting mega-fires in the past. Hence, Pacific Gas & Electric (PCG) is being blamed for a fire caused by Climate Change.
On the other hand, PG&E burned fossil fuels, including natural gas, to create electricity for over a century. However, Pacific Gas & Electric is a leader in solar electric.
For instance, PG&E plans eight solar farms that could provide up to 52 megawatts of electricity in California, PV-Magazine reports. In detail, a solar farm is a field full of photovoltaic solar panels that generate electricity which for the grid.
Will Pacific Gas & Electric (PCG) go bankrupt?
The Camp Fire is fueling speculation that Pacific Gas & Electric (PCG) will declare bankruptcy.
Many victims of the Camp Fire are already filing lawsuits against PG&E, news reports indicate. Plus Pacific Gas & Electric is already facing dozens of lawsuits over 2017 mega-fires.
Thus PG&E could pay billions of dollars to settle fire-related lawsuits. In fact, PG&E has borrowed $3 billion, presumably to pay or settle lawsuits, The Mercury News reports.
The fear is the cost of legal actions stemming from the mega-fires will drive P&GE into Chapter 11 Bankruptcy, The San Jose Mercury News reports. To elaborate, Chapter 11 Bankruptcy can protect a company’s assets from creditors and lawsuits.
Importantly, PG&E; which supplies natural gas and electric to 16 million people, will keep operating during Chapter 11. Conversely, Chapter 11 gives a bankruptcy court the power to reorganize a company and sell its assets.
Climate Change threatens PG&E’s Financial Health
The bottom line is that Climate Change threatens Pacific Gas & Electric’s (PCG) financial health and survival.
In fact, California legislators are so concerned about P&GE’s financial health they are considering a bailout. Disturbingly, Pacific Gas & Electric’s financials give legislators plenty of reason for concern.
For example, PG&E’s revenue growth great has been negatives for five straight quarters. Tellingly, Pacific Gas & Electric’s revenues were growing until 4th Quarter 2018 when California concluded what was its largest and most destructive fire season on record.
For instance, PG&E records negative revenue growth rates of: -3.01% for 3rd Quarter 2018, -0.38% for 2nd Quarter 2018, -4.9% for 1st Quarter 2018, and -13.01% for 4th Quarter 2018. Thus, Pacific Gas & Electric has been incapable of revenue growth for over a year.
Is Pacific Gas & Electric (PG&E) making money?
However, PG&E is still making money despite Climate Change. For instance, Pacific Gas & Electric records a gross profit of $1.445 billion, an operating income of $696 million, and a net income of $564 million for 3rd Quarter 2018.
Conversely, PG&E recorded an operating loss of -$1.4655 billion and a net loss of -$984 million for 2nd Quarter 2018. Thus, Pacific Gas & Electric still making money but it could face huge losses.
Interestingly, PG&E records a gross profit of $1.406 billion for 2nd Quarter 2018. Hence, the money is still there but lawsuits could take it.
Notably, PG&E seems to be burning cash to keep afloat. For instance, Pacific Gas & Electric records a negative free cash flow of -$212 million and an operating cash flow of $1.483 billion for 3rd Quarter 2018.
Is Pacific Gas & Electric (PCG) Running out of Money?
Plus there was a financing cash flow of $152 million on September 30, 2018. That means PG&E is borrowing money to pay bills or lawsuits. Tellingly, Pacific Gas & Electric records financing cash flows of $552 million and $718 million for 2nd and 1st Quarters 2018.
Thus PG&E could run out of money. However, Pacific Gas & Electric recorded $430 million in cash and equivalents on September 30, 2018, up from $198 million in September 2017.
Unfortunately, the cash burn could increase because PG&E management is putting money away for lawsuit settlements and legal expenses. Incredibly, Pacific Gas & Electric’s legal troubles could soon get far worse.
Pacific Gas & Electric (PCG) could face criminal charges over fires
California’s Deputy Attorney General is considering criminal charges against PG&E over the Camp Fire.
Nicholas Fogg revealed his office could charge Pacific Gas & Electric (PG&E) with manslaughter or murder because of the Camp Fire, The Mercury News reports. Fogg; California’s Deputy Attorney General, mentions murder and manslaughter charges in a letter to U.S. Judge William Alsup.
“PG&E could have committed involuntary manslaughter, starting a fire without permission, and failing to keep its lines and poles clear of vegetation,” Fogg writes. “As recklessness as defined (by the law) PG&E could have committed the felony of unlawfully starting a fire, and at malice, PG&E could have committed murder.”
For instance, recklessly setting fire to a forest is a felony in California, Alsup points out. On the other hand, to make murder or manslaughter charges stick a prosecutor needs to prove a person or organization responsible for a fire acted negligently or maliciously.
Climate Change could mean the End of Pacific Gas & Electric (PCG)
However, a murder or manslaughter conviction or guilty plea will allow the state to put PG&E on probation.
That means a judge could PG&E under the control of a court or the state. For example, the judge could fire all of PG&E’s executives and replace if it were on probation.
To make matters worse, California’s Public Utilities Commission is considering breaking up PG&E or replacing its management, The Mercury News reports. Hence, Pacific Gas & Electric (PCG) could face breakup or state control with felony charges.
Is Pacific Gas & Electric (PCG) a Value Investment?
Pacific Gas & Electric (PCG) is not a value investment because of its legal troubles. Instead, PG&E is a risky speculative investment to avoid.
Tellingly, PG&E has stopped paying a dividend. Its last dividend was 53¢ a share paid on 15 October 2017. Not surprisingly, the Pacific Gas & Electric dividend ended right before a series of catastrophic fires in November 2017. In particular, authorities blame 17 fires in the North Francisco Bay area in 2017 on PG&E equipment.
Under these circumstances, it is doubtful that Pacific Gas & electric shareholders will see a dividend soon. Instead, reorganization, bankruptcy, and collapsing share value could be PG&E’s future.
Therefore, PG&E was a dangerous risk not a bargain at the $23.80 share price recorded on 30 January 2019. I advise investors to stay away from it.
Are Utilities no longer Value Investments?
The situation at Pacific Gas & Electric (PCG) raises the question are electric utilities no longer value investments because of Climate Change?
Notably, Climate Change could force electric utilities to adopt expensive new sources of energy to replace fossil fuels. In addition, Climate Change could force utilities to spend big money upgrading infrastructure to prevent fires.
Notably, NV Energy; a power company in Nevada owned by Berkshire Hathaway (NYSE: BERK.B), is planning to build six new solar farms and energy facilities to provide one gigawatt (one billion watts) of electricity. Not coincidently, NV Energy is planning to retire a 254-megawatt coal-fired power plant in 2021, PV Magazine reports.
Moreover, two other Berkshire-owned utilities are trying to reduce exposure to Climate change. For instance, Mid-American Energy in Iowa plans to be 100% wind-powered by 2012. In addition, Pacificorp plans to build no new fossil fuel plants for 20 years.
Hence, Warren Buffett thinks electric utilities are still a value investment but fossil fuels are not. My guess is Buffett thinks fossil fuels are too risky now but electricity demand could increase because of new technologies like electric cars.
Climate Change could destroy many value investments
The situation at Pacific Gas & Electric (PCG) shows that all value investors must investigate Climate Change.
Climate Change believers could reduce risks to their portfolios by dumping fossil-fuel dependent utilities and electric utilities in drought-prone areas like the Southwest. Conversely, Climate Change deniers; whom I think are wrong, could make money betting on old-school electric utilities.
Pacific Gas & Electric’s woes prove Climate Change will disrupt utilities and destroy many value investments.