CA Utilities Teetering on The Edge of Bankruptcy
While California state lawmakers finally rushed to deal with the
short-term power supply crisis on Friday, the financial condition
of Southern California Edison (SCE) and Pacific Gas & Electric
moved closer to the terminal stage. So far the measures passed
appear inadequate to cure the utilities' financial woes, according
to many observers. Unless creditors see some ray of hope in
continuing legislative action they soon could force the utilities
The legislature passed a stop-gap bill authorizing the
Department of Water Resources to buy the power needed to keep the
lights on for the next 12 days, but the $400 million funding bill
did "nothing to resolve the utilities' financial crisis," Merrill
Lynch analysts said in a research note.
On Friday, the Senate began reworking Assembly Bill 1-X, which
"needs to be changed dramatically to keep the utilities out of
bankruptcy," according to Merrill Lynch. "The Senate Energy
Committee may make constructive enhancements to this bill. First,
we expect support for more contract price flexibility and a
near-term auction process. Second, we believe that some form of
securitization/rate carve-out could be proposed to support the
utilities unpaid power bills. We will keep focusing on actions
rather than words to determine whether bankruptcy will be avoided."
Fitch IBCA credit rating service noted on Friday, as it lowered
PG&E's ratings further, that even a "small group of unpaid
suppliers could file a petition for involuntary bankruptcy even if
the principal group of creditors reaches an agreement. Unless a
rescue package emerges to provide immediate cash, a voluntary
filing may become [the utility's] most expedient option."
Susan D. Abbott, managing director of corporate finance for
Moody's Investors Service, said despite the utilities' proximity to
insolvency, however, it still is hard to predict whether it will
come to that. "It's a matter of confidence and whether or not
people feel the actions that are being taken are going to be enough
to get the companies out of this mess."
The mess grew significantly larger last week, with the utilities
reporting new defaults almost daily. Moody's, Fitch and Standard
& Poor's downgraded the utilities credit and debt ratings to
junk status or outright default. The utilities have gone into
default on various credit lines and have seen their access to
capital markets disappear.
On Tuesday, Southern California Edison defaulted on $230 million
of principal and interest on maturing five-year notes and parent
company Edison International suspended payment of $366 million to
the California Power Exchange and several power generators.
On Friday, SCE's board reported to the Securities and Exchange
Commission that it would not pay its quarterly dividends on
cumulative preferred stock. SCE failed to pay maturing principal
and accrued interest totaling $206 million on its 5-7/8% notes. It
failed to make interest payments of about $24 million on two other
series of its senior notes and one series of mortgage bonds. It did
not pay $32 million of maturing commercial paper nor did it make
another payment of $215 million due to the California Power
Exchange (PX). It also predicted it would not make payments on $223
million of commercial paper through the end of the month.
Pacific Gas & Electric also defaulted on a combined $76
million of commercial paper and failed to make payments to the PX.
The downgrades last week by credit rating agencies constituted a
default under the utility's $850 million revolving credit facility
and entitled the banks to refuse a loan request under that
facility. The default precluded PG&E Corp. from making further
draws under its facilities, including further draws to repay
maturing commercial paper. PG&E has $501 million in commercial
paper outstanding of which $263 million will mature by Jan. 31.
"We are taking these steps reluctantly," PG&E Corp. Chairman
Robert D. Glynn Jr. said. "But it is critical that we extend our
existing cash reserves in order to meet basic expenses that are
essential to providing safe and reliable service to customers."
PG&E's upcoming payments to power generators include $583
million due to the California ISO on Feb. 1 and more than $100
million to the PX on Feb. 15. Another payment of $1.2 billion will
be due March 2. The utility also has payments of $420 million due
to qualifying generators (QFs) in early February and payments of
$410 million due to QFs in March. These amounts far exceed the
utility's current cash reserves of $700 million. PG&E Corp. has
cash reserves of $347 million.
The PX, which arranges the purchase of power in the state, plans
to suspend Edison's power-trading privileges and probably will do
the same against PG&E soon. Suspension would force the
utilities to trade in the over-the-counter market, where they have
no credit standing.
With about $12 billion in debt, the utilities are at the brink
of financial insolvency. Their bankruptcy would rank among the
nation's biggest, hitting creditors ranging from retirees invested
in traditional safe havens to institutional banks and corporations.
If the utilities do go belly-up, many creditors could be left
holding the bag for debt that may be much larger than has been made
Edison International has assets and investments totaling about
$38 billion, compared to PG&E Corp. with assets and investments
of about $34 billion. PG&E took action last week to shield its
National Energy Group subsidiary from the impact of potential
bankruptcy by it parent and sister companies through the formation
of a holding company and transferal of outstanding shares. S&P
rewarded the action by raising ratings on NEG and its divisions,
which focus on marketing, trading, energy services and power
generation in other parts of the country.
But bankruptcy could have many unforeseen consequences on the
state's new crisis management plan. "For one, a Pacific Gas and
Electric bankruptcy would reduce the role of the governor, the
legislature, and the CPUC as many substantive actions would be
under the direction of the bankruptcy court," Moody's said in a
statement last week. "Second, a Pacific Gas and Electric Company
bankruptcy would do little to fix the underlying problem, which in
Moody's opinion relates to a dysfunctional market and a
supply/demand imbalance. If anything, a bankruptcy of Pacific Gas
and Electric Company would greatly complicate the state's power
problems. Third, a utility bankruptcy would likely cause customers'
rates to increase above the current level and would raise
reliability issues for the state making rolling brownouts a common
occurrence for some period of time."
Bankruptcy of the two state utilities probably would make it
"impossible" to solve California's power woes, according to Abbott.
"I still don't know how they are going to keep the lights on."