On paper, PG&E Corp.’s natural gas network looks like it could fetch a nice price as the company prepares to file for bankruptcy: The system has 4.3 million customers and generates $4 billion in annual revenue.
In reality, California’s largest utility may find that the state’s ambitious environmental goals and stringent regulatory climate stand to limit the pool of interested buyers.
Any deal for PG&E’s sprawling gas network would face intense political and regulatory scrutiny. One obvious potential suitor — Sempra Energy — would run smack into antitrust concerns because it already provides gas in the state. And California’s goals to phase out greenhouse gas emissions by 2045 could render a fossil fuel network worthless.
“Any buyer of a gas system in California is going to have to know the landscape,” said Timothy O’Connor, senior director of the Environmental Defense Fund’s California energy program. “If you thought there was going to be no gas system in California in 2045 — the value of the current system would be a lot different.”
Reasons for a Sale
PG&E is considering selling its gas business, according to people familiar with the matter, as the utility owner faces $30 billion in potential liabilities from wildfires in 2017 and 2018 that left more than 100 dead. The company’s market value has dropped more than 80 percent in three months — to about $4.1 billion — and it plans to file for Chapter 11 as early as next week.
The utility owner hoped to net $10.7 billion to $15.5 billion by selling the system, according to National Public Radio, citing an unidentified company official. PG&E said in a recent regulatory filing it would explore selling assets and businesses, but the company has not publicly confirmed it would put the gas system on the block.
“The PG&E Board is reviewing structural options to best position PG&E to implement necessary changes while meeting customer and operational needs,” PG&E spokeswoman Lynsey Paulo said by email, without commenting specifically on assets for sale or potential bidders.
Climate Policy Looms Large
PG&E’s gas system itself, at least as it operates today, might only last a few more decades. Under an executive order signed by then-Governor Jerry Brown last year, California has set a goal of going carbon-neutral by 2045 and carbon-negative after that. It’s unclear exactly what that entails, because Brown didn’t spell it out. At the very least, it suggests a much smaller role for gas — if there’s any role left at all.
Even former PG&E Chief Executive Officer Geisha Williams said gas’s future appears limited in California.
“There’s no question that gas usage declines over time,” Williams said in 2017. “But I don’t think it’s overnight. I think it’s something that we have to manage.”
Regulatory Hurdles Are High
Any potential buyer would be in for a state regulatory grilling. The operations and upkeep of PG&E’s gas system came under intense public scrutiny in the years following the 2010 San Bruno pipeline explosion, which killed 8 people and led to a $1.6 billion fine as well as six criminal convictions against the company. Last month, regulators accused the utility owner of breaking natural gas pipeline safety rules and falsifying records.
“We’d want to see the compliance record of whoever’s buying it and make sure there’s an excellent track record there,” said Mark Toney, executive director of the Utility Reform Network consumer group. “We’d want to see that there’s a plan to invest in the system.”
And Then There’s Liability
Some of the company’s other assets could also be in play. PG&E owns more than 18,000 miles of high-voltage electricity transmission lines, 106,000 miles of lower-power distribution lines and a fleet of hydroelectric dams. Annual revenue from the electricity business regularly tops $13 billion. PG&E’s historic San Francisco headquarters, in the city’s downtown, could fetch $1 billion, according to estimates.
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But potential bidders for PG&E’s assets, especially the electricity ones, will have to factor in California’s strict approach to determining whether utilities are responsible for damages from wildfires. Under a legal doctrine known as inverse condemnation, California utilities can be held liable for blazes sparked by their equipment — even if they followed safety rules. PG&E’s power lines are suspected of starting a series of fires, including last year’s Camp Fire, the deadliest in California history.
California’s legislature has set up a committee to explore wildfire issues. The panel could recommend changes to inverse condemnation, but efforts to change it stalled last year.
Usual Suspects May Not Bite
Politics aside, PG&E’s web of gas conduits probably wouldn’t draw interest from traditional pipeline players, said Kathleen Connelly, an analyst at Fitch Ratings. Companies such as Kinder Morgan Inc. and Williams Cos. generally steer clear of systems that bring gas directly to homes and businesses. Plus, they “have better projects to pursue” in West Texas, New Mexico and the Gulf Coast, Connelly said.
Sempra owns and operates gas systems. But two of its subsidiaries — Southern California Gas and San Diego Gas & Electric — already cover the state’s densely populated southern end. California regulators and politicians might be leery of giving the company control over more territory. Plus, Sempra is still working to integrate Dallas-based Oncor Electric Delivery after buying it last year, said Morningstar utilities analyst Travis Miller.
“It doesn’t appear that they’re interested in another gas utility,” he said. “Obviously, never say never.”
A Sempra spokesman declined to comment.