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04/06 22:04

PG&E's Pacific Gas & Electric Files for Chapter 11 (Update7)

By Peter Robison

San Francisco, April 6 (Bloomberg) -- PG&E Corp.'s Pacific Gas & Electric utility filed for bankruptcy, saying it couldn't agree with California lawmakers on a plan to help repay $9 billion in debt from buying power at soaring prices. PG&E shares fell 37 percent.

The Chapter 11 filing, the largest ever for a utility, is an embarrassment for California Governor Gray Davis and state legislators. They had sought for months to rescue the company and keep California's lights on by reaching a settlement with generators, creditors, utilities and consumer groups.

PG&E's move shifts much of the decision-making power from the state to a U.S. bankruptcy court that may impose even higher electricity rates for consumers. The filing unnerved investors who have already seen PG&E's stock decline by more than 60 percent since October.

``This is taking the crisis in California thermonuclear,'' said David Huard, energy law attorney at Manatt Phelps & Phillips in Los Angeles. ``This throws all the assets into a pot and everyone who is owed money has to scramble.''

Lights Will Stay On

The utility is the state's largest, with 13 million customers in Northern and Central California. It listed assets of $24.18 billion and debts of $18.4 billion in its filing.

U.S. Bankruptcy Judge Dennis Montali allowed Pacific Gas to pay current bills to generators, the utility said. The ruling doesn't affect the unpaid bills accrued before the bankruptcy petition was filed. The judge also ruled that Pacific Gas can ``continue normal business operations,'' Pacific Gas said.

The utility said it expects to keep electricity flowing and continue paying its 21,500 employees during the proceedings. Montali is a former bankruptcy partner at the San Francisco law firm Pillsbury Winthrop.

PG&E shares, halted before the announcement, fell $4.18 to $7.20 once trading resumed. The parent company wasn't included in the filing by its utility unit. Earlier, the shares fell to $6.55. Shares of Edison International, owner of California's second- largest utility, fell $4.39 to $8.25.

``The regulatory and political processes have failed us, and now we are turning to the court,'' said Robert Glynn, chairman of Pacific Gas & Electric. Negotiations with state lawmakers on a comprehensive solution have ``gone nowhere,'' he said.

Governor Responds

PG&E ``has dishonored itself,'' Davis responded in a statement. PG&E ``plunged themselves into bankruptcy for their own strategic advantage'' and ``caused undue alarm,'' he said.

The state stepped in to buy power in January after the utilities couldn't get credit anymore and a power crunch forced scattered blackouts. Davis had been negotiating a rescue package that involves buying the utilities' transmission-lines and refinancing their debt with bonds.

Pacific Gas balked at giving up the lines, said State Senator Debra Bowen, chairwoman of the utilities committee. The filing complicates the state's plans because it now has to get the agreement of a majority of creditors and could face a bidding war for any purchase of PG&E's lines, she said.

``We do lose control over how decisions are made here,'' she said. ``The table just got a whole lot bigger. It's going to be a much slower train.''

Bankruptcy lawyers said it could take months or years to reach a settlement, given the complexity of the case. The bankruptcy is the third-biggest in U.S. history by the size of assets, trailing only Texaco Inc. in 1987 and Financial Corp. of America in 1998.

Higher Rates Possible

The court has the authority to raise rates until the utility's costs are met. It could order consumers to pay double or triple current rates, said Charles Tatelbaum, a bankruptcy attorney based in St. Petersburg, Florida.

The crisis stems from flaws in California's 1996 deregulation law. The law capped the rates utilities could charge consumers, even as wholesale power prices increased as much as 100-fold. Tight supplies, lower hydroelectric output and power-plant breakdowns have contributed to the crisis.

PG&E's move leaves Davis' entire rescue plan in question and makes it more likely that Edison's Southern California Edison will have to declare bankruptcy, said Susan Abbott, a managing director in the public utilities group at Moody's Investors Service.

``Can the state continue its plan of buying power?'' she asked. ``If it can't, then Southern California Edison will find itself in the same situation.''

Edison

Edison International Chief Financial Officer Ted Craver said the company doesn't plan to seek bankruptcy protection. ``In any practical sense, this raises the risk'' that creditors will petition to put the utility into involuntary bankruptcy, he said in a conference call with bondholders.

In February, Edison reached agreement with negotiators for Davis on the outlines of a plan to sell its transmission lines to the state for $2.76 billion. Davis said he's meeting today with Southern California Edison Chief Executive John Bryson to work out ``the few remaining issues.''

PG&E filed for bankruptcy protection only a day after Davis made a televised address to rally support for his plan and endorsed raising electricity rates for the first time, by as much as 34.5 percent.

``PG&E chose this moment to press upon the state and the governor that his plan is not adequate,'' said Huard, the energy- law attorney. ``It's got to be seen as a complete and utter rejection of the governor's plan.''

Strategy

John Kohli, manager of the $1.58 billion Franklin Utilities Fund, said the bankruptcy filing may be an effort by the utility to prod state officials into treating it favorably. The fund owns 600,000 shares in PG&E.

``This could be their ultimate card they are playing,'' he said.

PG&E may have been willing to contemplate bankruptcy because the utility isn't ``as exciting a growth business'' as the parent company's other units, said Douglas Christopher, a utility analyst at Crowell, Weedon & Co. in Los Angeles.

``I do think they could have put up a better fight, but maybe they don't care about the utility business,'' he said.

Energy companies, many Wall Street analysts and the Republican minority in the state Legislature faulted Davis and lawmakers for their handling of the crisis.

State lawmakers ``really weren't solving (PG&E's) financial problems -- they were solving everyone else's problems,'' said John Nichol, manager of Federated Utility Fund, which owns 195,000 shares of PG&E. The fund has cut its stake from 471,000 shares on Sept. 30 of last year.

Vance Meyer, a spokesman for Enron Corp., the world's biggest energy trader, said Davis and lawmakers ``lacked the bold leadership to take swift, decisive action.''

Large creditors to Pacific Gas & Electric include the California Power Exchange, a defunct electricity marketplace, which is owed more than $1.9 billion for power purchases.

Other Creditors

PG&E said in its filing that its largest unsecured creditor is Bank of New York Co., with $2.2 billion. Bank of New York spokesman Cary Giacalone said the bank is corporate trustee for Pacific Gas & Electric, meaning it helped the utility raise the debt but didn't lend any of its own capital.

Bank of America Corp. held $938 million, according to the filing. The bank was the lead arranger for a syndicated loan with other banks, and its exposure is ``significantly less'' than that, said bank spokeswoman Shirley Norton.

Merrill Lynch & Co. analyst Steve Fleishman said PG&E's stock could still be worth $12 to $13, based on the value of its unregulated non-utility businesses. He kept a rating of ``accumulate'' on the stock for high-risk investors.

Shares of lenders and power suppliers owed money by the utility dropped. Bank of America Corp. fell $2.26, or 4.4 percent, to $49.59. J.P. Morgan Chase & Co. fell $2.11, or 5 percent, to $40.39. Bank One Corp. fell $1.29, or 3.7 percent, to $33.61.

Mirant Corp., which owns California plants able to produce enough power to light 3 million homes, fell 4.2 percent to $29.60. Duke Energy Corp., which produces about 5 percent of the state's power, fell 5.4 percent to $40.10. Dynegy Inc. fell 6.7 percent to $47.50.

``The concern with the generators is clearly that they're not going to get paid anywhere near (the price) they sold power for to the California grid,'' said David Schanzer, a Janney Montgomery Scott LLC analyst.

-- (in@energy.news), April 07, 2001