While California state lawmakers finally rushed to deal with theshort-term power supply crisis on Friday, the financial conditionof Southern California Edison (SCE) and Pacific Gas & Electricmoved closer to the terminal stage. So far the measures passedappear inadequate to cure the utilities’ financial woes, accordingto many observers. Unless creditors see some ray of hope incontinuing legislative action they soon could force the utilitiesinto bankruptcy.

The legislature passed a stop-gap bill authorizing theDepartment of Water Resources to buy the power needed to keep thelights on for the next 12 days, but the $400 million funding billdid “nothing to resolve the utilities’ financial crisis,” MerrillLynch 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 ofbankruptcy,” according to Merrill Lynch. “The Senate EnergyCommittee may make constructive enhancements to this bill. First,we expect support for more contract price flexibility and anear-term auction process. Second, we believe that some form ofsecuritization/rate carve-out could be proposed to support theutilities unpaid power bills. We will keep focusing on actionsrather than words to determine whether bankruptcy will be avoided.”

Fitch IBCA credit rating service noted on Friday, as it loweredPG&E’s ratings further, that even a “small group of unpaidsuppliers could file a petition for involuntary bankruptcy even ifthe principal group of creditors reaches an agreement. Unless arescue package emerges to provide immediate cash, a voluntaryfiling may become [the utility’s] most expedient option.”

Susan D. Abbott, managing director of corporate finance forMoody’s Investors Service, said despite the utilities’ proximity toinsolvency, however, it still is hard to predict whether it willcome to that. “It’s a matter of confidence and whether or notpeople feel the actions that are being taken are going to be enoughto get the companies out of this mess.”

The mess grew significantly larger last week, with the utilitiesreporting new defaults almost daily. Moody’s, Fitch and Standard& Poor’s downgraded the utilities credit and debt ratings tojunk status or outright default. The utilities have gone intodefault on various credit lines and have seen their access tocapital markets disappear.

On Tuesday, Southern California Edison defaulted on $230 millionof principal and interest on maturing five-year notes and parentcompany Edison International suspended payment of $366 million tothe California Power Exchange and several power generators.

On Friday, SCE’s board reported to the Securities and ExchangeCommission that it would not pay its quarterly dividends oncumulative preferred stock. SCE failed to pay maturing principaland accrued interest totaling $206 million on its 5-7/8% notes. Itfailed to make interest payments of about $24 million on two otherseries of its senior notes and one series of mortgage bonds. It didnot pay $32 million of maturing commercial paper nor did it makeanother payment of $215 million due to the California PowerExchange (PX). It also predicted it would not make payments on $223million of commercial paper through the end of the month.

Pacific Gas & Electric also defaulted on a combined $76million of commercial paper and failed to make payments to the PX.The downgrades last week by credit rating agencies constituted adefault under the utility’s $850 million revolving credit facilityand entitled the banks to refuse a loan request under thatfacility. The default precluded PG&E Corp. from making furtherdraws under its facilities, including further draws to repaymaturing commercial paper. PG&E has $501 million in commercialpaper outstanding of which $263 million will mature by Jan. 31.

“We are taking these steps reluctantly,” PG&E Corp. ChairmanRobert D. Glynn Jr. said. “But it is critical that we extend ourexisting cash reserves in order to meet basic expenses that areessential to providing safe and reliable service to customers.”

PG&E’s upcoming payments to power generators include $583million due to the California ISO on Feb. 1 and more than $100million to the PX on Feb. 15. Another payment of $1.2 billion willbe due March 2. The utility also has payments of $420 million dueto qualifying generators (QFs) in early February and payments of$410 million due to QFs in March. These amounts far exceed theutility’s current cash reserves of $700 million. PG&E Corp. hascash reserves of $347 million.

The PX, which arranges the purchase of power in the state, plansto suspend Edison’s power-trading privileges and probably will dothe same against PG&E soon. Suspension would force theutilities to trade in the over-the-counter market, where they haveno credit standing.

With about $12 billion in debt, the utilities are at the brinkof financial insolvency. Their bankruptcy would rank among thenation’s biggest, hitting creditors ranging from retirees investedin traditional safe havens to institutional banks and corporations.If the utilities do go belly-up, many creditors could be leftholding the bag for debt that may be much larger than has been madepublic.

Edison International has assets and investments totaling about$38 billion, compared to PG&E Corp. with assets and investmentsof about $34 billion. PG&E took action last week to shield itsNational Energy Group subsidiary from the impact of potentialbankruptcy by it parent and sister companies through the formationof a holding company and transferal of outstanding shares. S&Prewarded the action by raising ratings on NEG and its divisions,which focus on marketing, trading, energy services and powergeneration in other parts of the country.

But bankruptcy could have many unforeseen consequences on thestate’s new crisis management plan. “For one, a Pacific Gas andElectric bankruptcy would reduce the role of the governor, thelegislature, and the CPUC as many substantive actions would beunder the direction of the bankruptcy court,” Moody’s said in astatement last week. “Second, a Pacific Gas and Electric Companybankruptcy would do little to fix the underlying problem, which inMoody’s opinion relates to a dysfunctional market and asupply/demand imbalance. If anything, a bankruptcy of Pacific Gasand Electric Company would greatly complicate the state’s powerproblems. Third, a utility bankruptcy would likely cause customers’rates to increase above the current level and would raisereliability issues for the state making rolling brownouts a commonoccurrence 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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