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Creditors Threaten Utilities' Finances
Suppliers try to force Edison into bankruptcy
David Lazarus, Chronicle Staff Writer Saturday, March 17, 2001 ©2001 San Francisco Chronicle
California's cash-poor utilities faced a renewed threat of financial catastrophe yesterday as impatient creditors for the first time moved to start bankruptcy proceedings.
"The California power crisis is now back on red alert," said Steven Fleishman, Merrill Lynch's influential energy analyst. "If the stakes were already high, now they're higher still."
Efforts by power companies to recover costs from the utilities could derail efforts by Gov. Gray Davis to remedy California's energy mess by purchasing the utilities' power lines.
The talks are still slogging through a pea soup of issues and legal details. Pacific Gas and Electric Co. is reluctant to sell its transmission lines, and to part with them at all the company wants considerably more than the $5 billion the state is believed to be offering.
While the creditors are going after Southern California Edison, which owes millions of dollars to smaller power companies, analysts said similar bankruptcy proceedings against PG&E could follow at any time.
The heightened potential for one or both of California's two biggest utilities going bankrupt sent a chill through investors. Shares of PG&E Corp. fell almost 12 percent yesterday to $11.42, while Edison International dropped 10 percent to $12.24.
Moving quickly to stem Wall Street's jitters, PG&E's chief financial officer, Kent Harvey, said in a conference call that the utility will pay off a portion of its debts to power companies and intends to make good to all creditors.
"The message they're trying to send is that they're in a better position than Edison," said Paul Patterson, an analyst at Credit Suisse First Boston. "They wanted to make clear that no one is threatening them with bankruptcy."
Not yet. For the moment, all eyes are on Edison.
Coram Energy Group, an alternative energy provider that supplies electricity to the Southern California utility, said it is owed as much as $350,000 for past transactions.
Frustrated by the slow pace of Davis' efforts to resolve the situation, Coram said it will initiate a petition to force Edison into bankruptcy. The company would need the cooperation of only two other generators to bring the matter to a bankruptcy judge.
"It will be fairly easy for Coram to collect the two other signatures," Patterson said.
Kevin Kelley, an Edison spokesman, declined to comment on the creditors' move. "We're doing everything we can to avoid bankruptcy," he said.
DISCONTENT AMONG SMALL FIRMS Growing discontent among smaller power companies, known in the industry as "qualifying facilities," represents a new challenge for the governor, who has been struggling to keep the firms in line as he deals with PG&E and Edison.
"We're on the phone all the time with these guys," said Steve Maviglio, a spokesman for Davis. "We've been trying to work something out."
If more creditors cut loose and seek redress in bankruptcy court, any state bailout of the utilities, which are saddled with more than $13 billion in debt,
could quickly unravel.
A bankruptcy court, for example, could block the sale of transmission lines and order higher rates for consumers.
SOME PLANTS SHUT DOWN At the same time, analysts said the creditors -- some of which have had to shut down plants due to unpaid bills -- may view bankruptcy proceedings as the only way to recoup even a portion of past expenses before they too face financial ruin.
"Involuntary bankruptcy is something done by people who are fed up and want to send a message," said Wesley Avery, a Los Angeles bankruptcy lawyer.
However, he noted that several obstacles still would have to be overcome to force either Edison or PG&E into bankruptcy. First, a bankruptcy court would have to decide whether to even accept the creditors' petition.
If it does, the judge subsequently could rule that the creditors' losses are not significant enough to merit forcing an entire utility into bankruptcy.
The judge also could postpone acting on the matter until the governor has had a chance to complete his negotiations with the utilities and seek an alternative remedy.
On the other hand, Avery noted that Edison and PG&E already meet one of the key criteria for involuntary bankruptcy: "They are regularly missing payments."
A company forced into bankruptcy has less control over its fate than one that voluntarily seeks Chapter 11 protection. Avery thus said the likely strategy for both Edison and PG&E would be to wait until an involuntary bankruptcy looks imminent and then to quickly file voluntary papers.
BANKRUPTCY LAWYERS RETAINED PG&E retained bankruptcy lawyers from the New York firm of Weil, Gotshal & Manges last August. Sources within the utility said bankruptcy papers already have been drawn up and are ready to be filed at a moment's notice.
The governor has had to face such pressure in negotiating to purchase PG&E's power lines and coastal property. Sources familiar with the talks said the utility keeps sending mixed signals on its commitment to actually cutting a deal.
For example, the sources said PG&E's chairman, Robert Glynn, will agree to various terms offered by Davis. But the next day, they said, a team of PG&E lawyers will backpedal from the accord.
-------------------------------------------------------------------------------- Update -- Pressure: Small power companies initiated moves that could force California's two biggest utilities into bankruptcy.
-- At stake: Gov. Gray Davis tried to prevent small creditors from pursuing bankruptcy proceedings that could undermine his plan to bail out cash-strapped utilities.
-- Worries: Shares of PG&E Corp. and Edison International dropped sharply on fears of bankruptcy.
-- Scramble: PG&E, hoping to reassure investors, says it will pay off part of the utility's debt.
E-mail David Lazarus at email@example.com.
-- Martin Thompson (firstname.lastname@example.org), March 17, 2001