California regulators must weigh whether a $2.25 billion penalty for safety lapses is worth potentially pushing PG&E Corp. (PCG:US), owner of the state’s largest utility, into bankruptcy for the second time in 12 years.
PG&E expects the California Public Utilities Commission to decide by the end of this year on a punishment for a September 2010 natural gas pipeline explosion that killed eight people. Imposing the staff’s proposed penalty may force the company into bankruptcy if it can’t sell enough shares to pay for it, Chairman and Chief Executive Officer Tony Earley said in an interview yesterday at Bloomberg headquarters in New York.
“If the purpose was to get the company’s attention, you have the company’s attention,” said Earley, who took over a year after the accident. A $2.25 billion penalty would bring PG&E’s total tab for the disaster to $4 billion, including money already spent on pipeline upgrades and safety work, Earley said. The San Francisco-based company has asked regulators to credit money already spent against any fine imposed.
Moody’s Investors Service and Standard & Poor’s have said they will review California’s regulatory system if the full penalty is assessed. PG&E put its utility unit into bankruptcy in 2001 after amassing $9 billion in debt when electricity costs tripled in the aftermath of the state’s deregulation of power markets and regulators didn’t act quickly enough to raise customer rates.
“Staff made a recommendation regarding a penalty and parties and PG&E provided comments,” Terrie Prosper, a spokeswoman for the commission, said in an e-mail yesterday. “The matter is now in the hands of administrative law judges.”
California is confronting a challenge faced across the U.S.: how to pay for an estimated $1.5 trillion needed for infrastructure upgrades while keeping rates low. In the case of PG&E, regulators are seeking to get billions in system upgrades and penalize the company for safety violations while maintaining a financially healthy utility with low borrowing costs.
Last month, staff of the commission changed a prior recommendation and called for PG&E to pay $2.25 billion in penalties for the explosion in San Bruno, California, including a $300 million fine for violating safety rules. An earlier proposal, which PG&E supported, would’ve given the company credit for money already spent on upgrades and safety work.
“We are at a real turning point that will determine whether the company will continue to make the progress we made or will it end up being a company that is just struggling along because we are financially hobbled,” Earley said.
El Paso Corp. paid $101.5 million for a explosion in 2000 that killed 12 people in Carlsbad, New Mexico. There “seems to be some momentum behind a penalty, relative to the size of the company, larger than anyone has ever seen,” Earley said.
The proposal is more than four times the company’s net income last year and is 15 years worth of earnings for the gas business, Earley said. Moody’s said in a July 10 note that the proposed penalty “does not bode well for the regulatory environment in California.”
Overland Consulting said in a August 2012 report commissioned by the state that PG&E can afford to pay a $2.25 billion penalty without hurting its creditworthiness. The commission has asked PG&E to file an explanation today of how it intends to finance the proposed penalty.
“We don’t find Mr. Earley’s comments consistent with PG&E’s own experts and with the report that was independently commissioned and prepared,” Connie Jackson, San Bruno’s city manager, said yesterday. The city has called for a penalty as large as $3.85 billion.
PG&E might be able to issue stock to pay a $2 billion penalty, Eric Fornell, a vice chairman at Wells Fargo Securities, testified at a March 5 commission hearing. Such an outcome may limit future capital spending by the company, which would “probably” survive, he said, according to a transcript.
The decision is now before two administrative law judges, who will send their recommendation to the five-member commission, which will vote on a penalty.
PG&E dropped (PCG:US) 1.7 percent to $42.04 at the close in New York. The shares have declined 13 percent since the blast, compared with an 18 percent increase for the Standard & Poor’s 500 Utilities Index.
The discount in PG&E’s stock reflects the fact that investors anticipate a “significant” sale of more stock, not a bankruptcy filing, said Kit Konolige, a New-York based analyst for BGC Financial LP, who rates the shares a buy and doesn’t own them.
“Even $4 billion is something that a company this size can afford,” Konolige said in an interview.
PG&E has already spent or is planning to spend about $2.2 billion to fix its gas system, Earley said.
“Penalties should hurt a little,” said Mindy Spatt, a spokeswoman for the Utility Reform Network, a customer advocacy group based in San Francisco. “PG&E seems to think penalties shouldn’t hurt at all. They’re just whining.”
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