A Growing Corporate Concern: Climate -- WSJ

01/19/19 02:47 AM EST

PG&E's collapse shows the warming planet is ever-more capable of delivering sudden shocks to the balance sheet

By Russell Gold 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 19, 2019).

PG&E Corp.'s bankruptcy could mark a business milestone: the first major corporate casualty of climate change. Few people expect it will be the last.

California's largest utility was overwhelmed by rapid climatic changes as a prolonged drought dried out much of the state and decimated forests, dramatically increasing the risk of fire. On Monday, PG&E said it planned to file for Chapter 11 protection by month's end, citing an estimated $30 billion in liabilities and 750 lawsuits from wildfires potentially caused by its power lines.

The company's fall has been fast and steep. In October, its market value was $25 billion. This week, it was removed from the S&P 500 as its value tumbled below $4 billion and its shares fell to their lowest level since at least 1972.

The PG&E bankruptcy could be a wake-up call for corporations, forcing them to expand how they think about climate-related risks, management consultants and other experts said.

Previously, companies mainly worried over risks from new governmental regulations related to climate change, said Christophe Brognaux, a managing director at Boston Consulting Group. The PG&E case makes clear that companies also have to worry about sudden, and potentially unexpected, impacts to their core assets and liabilities, he added.

"Physical risks have only recently manifested themselves. This is a fairly new development," said Bruce Usher, a professor at Columbia University's business school who teaches a course on climate and finance. "If you are not already considering extreme weather and other climatic events as one of many risk factors affecting business today, you are not doing your job."

J. Bennett Johnston, a former Democratic U.S. senator from Louisiana who has served on Chevron Corp.'s board of directors, said the potential for climate change to damage company assets and cause a mushrooming of liabilities is an emerging enterprise risk.

"The business community, by and large, has gotten the message," he said. "You have to be pretty stupid not to see we're in the midst of a climate crisis and it's getting worse."

Climate wasn't the only factor that is pushing PG&E to a likely bankruptcy. State regulations also played a role. PG&E is required to provide electrical service to the thousands of people moving annually in the state's forested areas. Moreover, an unusual California state law, known as "inverse condemnation," made PG&E liable if its equipment started a fire, regardless of whether it was negligent.

PG&E capital spending plans are overseen by state regulators, who pressed the company to spend more on tree trimming but not, until a few months ago, on other fire-prevention measures such as early-warning weather stations and insulated wires.

PG&E's former chief executive, Geisha Williams, told an investor conference in January 2018 that policies such as inverse condemnation could undermine the financial health of utilities and make them unable to carry out aggressive efforts to combat carbon emissions. "This policy isn't affordable, and it isn't sustainable. Ultimately, it carries grave implications for the industry's financial health and our ability to attract the investment the state needs to fulfill its climate goals," she said.

PG&E announced on Jan. 13 that Ms. Williams was stepping down as CEO as the political and financial fallout from the wildfires continued to grow.

In less than a decade, PG&E, which serves 16 million customers, saw the risk of catastrophic wildfires multiply greatly in its vast service area, which stretches from the Oregon border south to Bakersfield. Weather patterns that had been typical for Southern California -- such as the hot, dry Santa Ana winds that sweep across the region in autumn, stoking fires -- were now appearing hundreds of miles to the north.

"The Santa Ana fire condition is now a Northern California fire reality, " said Ken Pimlott, who retired last month as director of the California Department of Forestry and Fire Protection, or Cal Fire. "In a perfect world, we would like to see all [of PG&E's] equipment upgraded, all of the vegetation removed from their lines. But I don't know anybody overnight who is going to catch up."

PG&E scrambled to reduce fire risks by shoring up power lines and trimming millions of trees. But the company's equipment kept setting fires -- about 1,550 between mid-2014 through 2017, or more than one a day, according to data it filed with the state.

PG&E has long accepted the science of climate change. It is one of several California utilities that, with prodding from state politicians, has been rapidly shifting to a cleaner energy future. It had $34.5 billion in long-term renewable energy contracts, according to a federal filing.

"Here was PG&E, the most 'woke' of utilities in terms of climate change, " said John Geesman, a former executive director and then member of the California Energy Commission. "Shouldn't they have been adapting to climate change more rapidly than others?"

Other California utilities, such as Sempra Energy's San Diego Gas & Electric, began investing years ago in technology to shut off certain power lines during high fire-risk periods as well as changing the layout of their wires to lower the chance of inadvertently sparking fires during wind storms.

Extreme weather has led to a few bankruptcies in the past. In 2005, Entergy Inc. placed its New Orleans unit into bankruptcy after a liquidity crisis caused by the flooding that followed Hurricane Katrina. That was a much smaller utility and the flooding was a largely man-made problem of neglected levees and other infrastructure designed to protect the city.

Other companies have been severely impacted by climate regulations. The market value of German utilities E.ON SE and RWE AG plummeted in the early part of this decade as heavy government subsidies for renewable energy undermined their business models. More recently, General Electric Co. miscalculated how a global renewable energy push would reduce demand for giant natural-gas turbines, one of the many woes that have battered the conglomerate.

The global business community is recognizing the risks it faces from climate change. This week, a World Economic Forum survey of global business and thought leaders found extreme weather and other climate-related issues as top risks both by likelihood and impact.

Companies and their risk officers should be more aware that climate change could lead to unexpected and rapid changes, said Paula DiPerna, a senior advisor to CDP, an international nonprofit organization that presses companies to disclose their environmental impact.

"There is a general sense among policy makers, the general public and corporations that climate change is going to happen slowly," she said. "On the contrary, climate change is an extremely unpredictable series of events. And in the face of that, companies should be very prepared."

-- Jim Carlton and Rebecca Smith contributed to this article.

Write to Russell Gold at russell.gold@wsj.com

 

(END) Dow Jones Newswires

January 19, 2019 02:47 ET (07:47 GMT)

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