California: Defaults followed by chaos

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Published Wednesday, January 17, 2001

Defaults followed by chaos POWER CRISIS Analysis

By Rick Jurgens TIMES STAFF WRITER

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PG&E Corp. and its creditors held back Tuesday from handing a federal bankruptcy judge the task of cleaning up their multibillion-dollar mess, but after a long day of financial maneuvering it was unclear whether they were only putting off the inevitable.

At the end of the day, both PG&E and the state's other large electricity utility, Southern California Edison, were in default; that is, they had violated their agreements with their lenders.

Since neither has been able to get loans in recent weeks anyway, the formal restriction had little immediate practical impact on their borrowing power.

Less clear was whether the technical default would reduce the willingness of vendors to sell PG&E and SoCal Edison the electricity they need to power the states' industries and light its homes. "That's really a question for the generators and brokers," said Ron Low, a PG&E spokesman. "We hope that's not the case."

In any case, default brought both utilities a step closer to bankruptcy, in which a federal judge would oversee day-to-day operations and the disposition of assets. Bankruptcy protection could be sought by the utilities or by their creditors.

Two lawyers who represented Public Service Company of New Hampshire, an electric utility that went into bankruptcy in 1988, warned of the pitfalls of that course of action. "My advice to California is, 'Don't do it if you don't have to,'" said Martin Gross, a Manchester, N.H., rate and regulatory lawyer for the company. "It's long and expensive and nobody is ever happy at the end."

Richard Levin, a lawyer with the Los Angeles firm of Skadden Arps Slate Meagher & Flom, also dismissed speculation that a bankruptcy judge would override state regulators and legislators to break the financial logjam preventing PG&E from charging more for power.

"The bankruptcy judge can't set rates," said Levin, who represented the New Hampshire utility in bankruptcy and has several clients who might be parties to a bankruptcy case involving the California utilities. "The only real special power (the bankruptcy judge) has is to get people talking to each other."

SoCal Edison led the way into default Tuesday morning when it announced that it would not pay $596 million now due to its lenders and creditors. The company said in a release that it was "attempting to avoid bankruptcy." Suspending payments was "intended to allow (the company) to continue to operate while efforts to reach a regulatory solution, involving both state and federal authorities, are underway," it said.

Herbert Hart, an analyst with Redwood Securities Group, a San Francisco investment firm said that SoCal Edison apparently was "trying to impress our friends in Sacramento that there is definite need for (quick) action."

SoCal Edison's move pushed into the foreground a pair of Wall Street firms that play a crucial but little noticed role in the economic life of industries and governments that raise money by issuing bonds -- interest-paying notes secured by the assets of borrowers.

First, Moody's Investors Services downgraded bonds issued by SoCal Edison and its parent, Edison International Inc., both of Rosemead. Moody's, a publicly traded New York City company with 700 analysts who rate the credit of corporate and government borrowers, said SoCal Edison's default gave the company's creditors the right to "seek remedies," such as bankruptcy.

But Susan Abbott, a managing director of Moody's, said in an interview that SoCal Edison's lenders and bond holders still had an incentive to hold off from forcing the company into bankruptcy because a settlement brokered by state officials promised relatively fast payment. Payments from a bankruptcy proceeding would take much longer, she said.

In a release, Moody's noted that bankruptcy would also limit the role of state officials in resolving the crisis, "do little to fix the underlying problem" of a malfunctioning market and power shortages, and "would likely cause customers' rates to increase above the current level."

Abbott said in an interview that, even after SoCal Edison's default, PG&E's rating had not been lowered "because they have not taken that step" of not paying lenders or creditors.

That was good news at the time because provisions written into PG&E's loan agreements require the company to maintain investment grade -- better than junk bond -- credit ratings, spokesman Low said.

But the other shoe dropped later in the day when Standard & Poor's, another New York City rating firm, declared that PG&E bonds were also, in the parlance of Wall Street, "junk." The agency cited "heightened probability of the utility's imminent insolvency," noting that its suppliers were demanding cash payments and that neither negotiations nor legislation appeared likely to "prevent a financial meltdown."

Standard & Poor's also said SoCal Edison's default would make it more difficult for PG&E to borrow again and might even make PG&E liable to pay a portion of the obligation that its southern counterpart had walked away from.

Low, the PG&E spokesman, said that despite the growing financial pressure, PG&E didn't want to see its affairs end up in the courts. "Bankruptcy would not be good for anyone," he said. "We are devoting all our resources to avoid it."

But Eduardo Schwartz, finance professor at UCLA's Anderson School, was more sanguine. He characterized the public moves as "positioning" by the utilities and their creditors. "Whether there is bankruptcy or not, these companies will continue to operate," he said. "The question is who will lose the money, the shareholders or the creditors."

Rick Jurgens covers economic developments and trends. Reach him at 925-943-8088 or rjurgens@cctimes.com.

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-- Martin Thompson (mthom1927@aol.com), January 17, 2001


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