KC's $6 million investment at stake in bankrupt PG&E

By LYNN HORSLEY - The Kansas City Star

Date: 04/06/01 22:15

Pacific Gas & Electric Co. -- a California utility in which Kansas City invested $6 million in commercial paper -- filed for Chapter 11 bankruptcy protection Friday.

The move heightens the uncertainty over whether Kansas City will recoup its investment in the utility.

Finance Department officials participated in a conference call Friday with company officials and said they remained hopeful.

"We're confident eventually we'll get paid in full," said Randy Landes, city treasurer, although he had no estimate on the time frame. "This is a surprise to everyone."

In filing for Chapter 11 protection, the utility said efforts by California Gov. Gray Davis and other state officials to ease the crisis had gone nowhere.

"The regulatory and political processes have failed us, and now we are turning to the court," said Robert D. Glynn Jr., chairman of corporate parent PG&E Corp. "We expect the court will provide the venue needed to reach a solution."

The 13 million people served by the utility probably will be among the least affected; bankruptcy proceedings allow companies to continue operating while they try to solve their financial problems under the supervision of a federal judge.

City Councilman Evert Asjes, a member of the city's investment committee, said that $6 million was a significant amount but that other governments and lenders had far more money at stake.

"Our exposure is greatly reduced from where we thought it would be," Asjes said. "We still think we're going to get our money."

Pacific Gas & Electric's preliminary bankruptcy filing lists its top creditor as Bank of New York, which was owed $2.2 billion as of September.

Under the worst-case scenario -- a default on the full $6 million -- the loss would reduce this fiscal year's projected investment return on the city's $690 million portfolio from about 5 percent to about 4 percent. The reduced investment return would affect the city's funds for operations and capital expenses but would not affect employee retirement funds.

In December, Kansas City made almost $26 million in short-term commercial paper investments in Pacific Gas & Electric Co. and Edison International, companies that have been financially besieged by the West Coast energy crisis.

Edison paid off the full $16 million it owed to Kansas City, and Pacific recently paid off $4 million it owed since Feb. 22. Pacific so far has been unable to pay off a $6 million payment due March 1.

The crisis is blamed on many factors, including high wholesale prices, a tight supply worsened by scarce hydroelectric power in the Northwest and maintenance of aging California power plants.

Earlier this week state power grid managers warned that California would see more than a month of rolling blackouts if residents used as much power this summer as last.

Landes said Pacific this week paid $33,000 in interest to cover the period from March 1 through March 31. He said he suspected the Chapter 11 filing would suspend additional interest payments.

Several Kansas City bankruptcy lawyers offered possible scenarios for what could happen to Kansas City's investment. R. Pete Smith, a lawyer with McDowell, Rice, Smith and Garr, said secured creditors come first, then unsecured such as Kansas City and then stockholders.

"Unsecured creditors go away and are placed in a corner for a long while," Smith said. "Nobody will know for some while whether and when and how much. You can bet it will be delayed and less than face value. People don't file Chapter 11 to pay their bills in full."

Dan Flanigan, a bankruptcy lawyer with Polsinelli, Shalton & Welte, said Pacific might be able to convince a court that it needed to continue business as usual on short-term commercial paper payments to maintain any semblance of future business viability.

Landes said that the city would take whatever administrative steps necessary to protect its position. "The company states its intention to pay all valid claims in full," he said.

When Kansas City bought commercial paper in Pacific Gas and Electric, the company held the top rating possible, but it was also listed on CreditWatch, a warning by rating agencies that a company's financial condition is under review and may be downgraded.

Since then, concern about the utility has prompted the city to reduce its commercial paper holdings and to adopt a more conservative policy to reduce future investment risks.

Link

-- Anonymous, April 07, 2001

Answers

Wow, I wonder how many other cities or entities have invested in them? Not Sweetie's 401(k) I hope.

-- Anonymous, April 07, 2001

Duke is our energy provider. . .

Charlotte Observer

Published Saturday, April 7, 2001

Chapter 11's waves hit Charlotte

Calif. utility files for bankruptcy; Duke Energy, BofA stocks take hits

By TED REED AMBER VEVERKA Staff Writers

California's largest utility filed for bankruptcy protection Friday, a move that spooked investors in two of the company's major Charlotte-based creditors, Bank of America Corp. and Duke Energy Corp.

San Francisco-based Pacific Gas and Electric said it was forced to seek protection under Chapter 11 of the bankruptcy code because negotiations with state officials have failed to produce a formula by which its revenues could repay its power costs.

"The regulatory and political processes have failed us, and now we are turning to the court," said Robert Glynn Jr., chairman of corporate parent PG&E Corp.

Shares of Bank of America, lead bank on several syndicated loans to the utility, closed Friday at $49.59, down $2.26 or 4.4 percent, on a down day for bank stocks. The S&P Index of Money Center banks also fell 4.4 percent.

Shares of Duke Energy, which is owed an undisclosed amount for power it sold to PG&E, closed at $40.10, down $2.30 or 5.4 percent.

Bank of America was lead bank on about $938 million in syndicated loans to PG&E. (It's also lead bank on a $500 million loan to PG&E Corp., the holding company, which has not filed bankruptcy.)

The bank wouldn't disclose its exposure to PG&E, but a lead bank typically retains about 10 percent of a syndicated loan.

"It should be noted that loans to companies in bankruptcy do not automatically result in a certain level of loss," the bank said in a statement. "Given the size of our company, with cash flow of $12billion and capital and reserves of more than $50 billion, we are quite capable of dealing with this development."

Similarly, Duke Energy said "the Chapter 11 filing provides a defined process to collect our past receivables and keep PG&E in business going forward."

Duke, which wouldn't disclose its exposure to PG&E, said in January that it had set aside $110 million to cover exposure to the California market.

Duke said Friday that it has taken steps to limit its exposure to uncertainties in the California energy market, including selling the vast majority of its power to credit-worthy companies under contracts for future delivery.

Duke spokesman Tom Williams said the company, which produces about 5 percent of California's power, has sold 80 percent to 90 percent of its power under the future contracts. "We don't have a whole lot left to sell," Williams said.

If Bank of America indeed holds 10 percent of $938 million in syndicated loans, that exposure would not be significant for a bank of Bank of America's size, said Tom Therkauf, bank analyst with Keefe, Bruyette & Woods. In a recent Securities and Exchange Commission filing, utilities didn't make a Top 10 list of industries with outstanding loans to Bank of America.

Still, while Bank of America might not have enormous exposure to PG&E, the utility's bankruptcy filing comes at a time when the slowing economy is causing more companies to default on their bank loans. In that context, news of the bankruptcy may rattle holders of bank stocks. Charlotte's First Union Corp. does not have exposure to PG&E, a bank spokeswoman said.

The bankruptcy filing came one day after California Gov. Gray Davis proposed relieving utilities' debts by giving them a share of a record rate increase approved last week and by continuing to negotiate the state's purchase of their transmission lines. PG&E Corp., however, said those negotiations were "going nowhere."

Davis spokesman Steve Maviglio said the bankruptcy filing was a surprise. He said aides were meeting with the attorney general's office and bankruptcy lawyers to discuss the implications.

Southern California Edison, the state's second-largest utility, issued a statement suggesting it has no immediate plans to seek bankruptcy protection.

-- Anonymous, April 07, 2001

Edison will Git. It's the only smart move at this late date. Better operating under a fed judge's assessment than (don't you just love my hair} Gray's best guesses.

-- Anonymous, April 08, 2001