PG&E Pushes for Creditor Support in Bankruptcy

Pacific Gas and Electric Co. took two significant steps in its ongoing federal bankruptcy proceedings last week, while its holding company, PG&E Corp., was being targeted by the California Attorney General for federal investigation of possible misappropriations of funds between the parent company and the financially troubled utility.

After asking on July 3 for more time to prepare its bankruptcy (Chapter 11) reorganization plan, the PG&E utility last Friday announced that it has struck a deal with the San Jose, CA-based independent power company, Calpine Corp., in a binding agreement to have the utility modify and assume all of its Qualifying Facility (QF) contracts with Calpine, meaning it accepts responsibility for $267 million in past-due billings it owes Calpine. The 11 contracts cover about 600 MW of power supplies.

Earlier last week the utility filed a request with the U.S. Bankruptcy Court in San Francisco to get an extra four months until Dec. 6, 2001, to file a reorganization plan. The court is scheduled to react to the request July 24. Under the current timeline, the deadline to file such a plan is Aug. 6, 120 days after the Company's historic April 6 Chapter 11 filing.

Calling its case "one of the largest and perhaps most complex" bankruptcy proceedings ever, PG&E's utility noted that there are a number of unresolved regulatory issues and proceedings pending, including the federal settlement discussions that began June 25, also weighing heavily on the eventual reorganization plan. The utility assured the court it had no intention of delaying the case and it is already "well into the process of plan formulation" in a proceeding in which the utility estimates costs run "literally millions of dollars-per-week."

Meanwhile, last Thursday, state Attorney General Bill Lockyer asked the federal Securities and Exchange Commission to investigate PG&E Corp. for what it described as "potential" abuses of its responsibilities as a utility holding company under the Public Utility Holding Co. Act of 1935 (PUHCA) involving about $4 billion of transfers from the utility to the parent. A San Francisco-based PG&E spokesperson said all of the transactions have previously been reviewed by state regulators and the state legislature, and that PG&E is exempt from PUHCA because most of its utility operations are confined to California.

The state attorney general is asking the SEC to withdraw PG&E Corp.'s exemption because of its $13 billion in assets outside of California. Most of those assets are in nonutility businesses under its National Energy Group.

In the QF deal, both future economic and operating reliability will be assured from the 11 Calpine plants since the power plant developer/operator "forced an early resolution of this in bankruptcy court," according to Calpine officials briefing news media in a conference call last Friday. The deal provides both "predictability" and "assurance of an earnings stream" for Calpine.

Calpine and PG&E last week filed a stipulation with the federal bankruptcy court in San Francisco Friday, seeking authorization for PG&E to assume the modified Calpine QF contracts. The court is scheduled to approve the agreement on July 12, 2001.

Under the terms of the agreement, which is an outgrowth of a recent state regulatory decision, Calpine will continue to receive its contractual capacity payments plus a five-year fixed energy price component of approximately 5.37 cents/kwh. In addition, all past due receivables under the QF contracts will be elevated to administrative priority status and paid to Calpine, with interest, upon the effective date of a confirmed plan of reorganization.

Calpine believes the pricing spreads between fuel costs and the 5.37 cents/kwh price "are very attractive," according to the merchant generator's officials, who noted that the company has locked in natural gas supplies for the QF plants in the $3 to $4/MMBtu range. The deal is effective when the reorganization plan for the PG&E utility is accepted and the company begins to exit bankruptcy.

"Administrative claims enjoy priority over payments made to the general unsecured creditors. As of April 6, 2001, Calpine had recorded approximately $267 million in accounts receivable with PG&E under its QF contracts," Calpine said in a written announcement. "QF facilities are an integral part of California's energy market, representing more than 20 percent of the state's power supply."

In the bankruptcy court, the PG&E utility followed up with another court filing last Thursday asking for authorization to ultimately pay $76 million in franchise fees in 267 cities and counties where it provides electric services, 238 for natural gas and four for oil pipeline operations.

Saying it has an "open and close working relationship" with its official unsecured creditors' committee, the PG&E utility said in its filing to the bankruptcy court that it wants to develop a reorganization plan that has "broad creditor support." The massive utility has 45,000 creditors, $20 billion in assets and 20,000 employees.

"Developing and filing a sound, comprehensive and feasible plan of reorganization is the most important step we can take toward completing the Chapter 11 process as expeditiously as possible," the utility said in a prepared statement. "Our request for an extension is intended to allow us the time necessary to ensure that the plan we present is the appropriate blueprint for meeting our obligations to creditors and emerging from Chapter 11 with our financial strength reaffirmed. The development of this plan is a top priority and our objective is to file it as soon as practicable."

PG&E's extension request "doesn't surprise me," said David Wiggs, interim general manager at the Los Angeles Department of Water and Power (LADWP) and the CEO at El Paso Electric Co. when it went through bankruptcy (1992-96). Wiggs noted that based on his experience the utility wants to take extra time to file a plan that has as much up-front support from creditors as possible. It takes a lot of time. "The issues they are facing as to who owns what part of the rates are very complicated and make a big difference to the creditors. That is going to take awhile.

"Compared to Texas, this (PG&E's case) is much more difficult, much more complicated. Now the state is in the business of buying power and financing that. It took El Paso four years and $100 million, and we solved it really with a political solution that could have been done and effectively offered before we went to bankruptcy."

LADWP is one of the creditors (about $80 million of unpaid bulk spot power supplies to the state transmission grid operator, Cal-ISO, or the now defunct California Power Exchange) and has retained its own outside bankruptcy attorney to protect the interests of the nation's largest municipal utility.

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