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 into bankruptcy.

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 public.

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."

Rocco Canonica

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