Suppliers may force Calif. utilities into bankruptcy

Monday, March 19, 2001 | 11:11 a.m.

SUN STAFF AND WIRE SERVICES

Edison International and PG&E Corp. shares dropped as much as 16 percent Friday on concern power suppliers may force Edison's utility into involuntary bankruptcy.

The owner of Coram Energy Group, a Tehachapi, Calif., wind-power supplier to Southern California Edison, said he signed a petition that may force the utility, a unit of Edison International, into bankruptcy if two other generators join in the next few days.

In a separate development, negotiations by the state to purchase utility power lines in exchange for cash to pay down debts will "never see the light of day," Dow Jones Newswires reported, citing an anonymous Southern California Edison executive. Utility creditors have been monitoring those negotiations to assess whether the companies would be able stave off bankruptcy.

"The California power crisis is now back on Red Alert," said Steven Fleishman, an analyst at Merrill Lynch & Co. "If the stakes were already high, now they're higher still," Fleishman said in a research report.

Edison shares closed down 10 percent at $12.24 Friday after falling as low as $11.13. PG&E fell 11.6 percent to $11.55, following a mid-day low of $10.76.

The threatened bankruptcy filing and a court decision in Las Vegas on Wednesday that gave an unsecured creditor a claim on Southern California Edison's interest in the Mohave Generating Station in Laughlin, Nev., have pushed stock and bond prices lower, analysts said.

Southern California Edison's unsecured 7.2 percent notes that mature in November 2003 were quoted down 5 points at a bid of 73 cents on the dollar and an offer of 75 cents, traders said.

California Gov. Gray Davis is negotiating with the utilities over a rescue plan, including having the state buy power on their behalf and offering to purchase their transmission systems. The pace of talks, and stalled legislation to get power suppliers paid, raises the risk of bankruptcy, analysts said.

"Clearly this puts a lot of pressure on Davis and the legislature to do something quickly," said Adam Gubner, a vice president and bankruptcy lawyer at Imperial Capital in Beverly Hills, Calif. "They've been dragging their feet."

Edison shares closed at $15.49 only eight days ago as investors were optimistic a tentative agreement by the state to buy Edison's transmission lines for $2.76 billion would produce a final rescue plan soon.

Willamette Industries, Inc., U.S. Borax, Inc., Sithe Energies, Inc., and FPL Group, Inc., other alternative energy producers, may also sign the bankruptcy petition, according to a Credit Suisse First Boston report. Any group of three unsecured creditors with more than $10,000 in claims can petition the court to put a company into involuntary bankruptcy.

Filing a petition isn't "a fait accompli" for a forced bankruptcy, said Brian O'Sullivan, whose Coram Group runs 283 wind turbines in Tehachapi, about 100 miles north of Los Angeles. It might be "a long way off," and "it's not preferred at all, imagine how tortuous it's going to be."

Coram is one of several alternative energy producers who said they haven't been paid for electricity delivered to Edison from as far back as November. These companies provide electricity from renewable sources like wind and solar power. They are small companies and can't wait long for payments.

"I don't think it's necessary for someone to file a petition against us" to underscore the urgency for solutions, PG&E Chief Financial Officer Peter Darbee said during a conference call with investors.

Creditors' concerns and the court ruling on the Edison lien have "served to further energize people involved" in the state negotiations, Darbee said. "We've seen a quickening of the pace," and "there's no merit" to comments the talks have broken down.

Southern California Edison, the state's second-largest investor-owned utility, and Pacific Gas & Electric Co., the state's largest, have defaulted on more than $1.3 billion of unsecured debt since Jan. 16.

The utilities racked up more than $12 billion in debt following a 1996 deregulation law that froze consumer rates while allowing wholesale-power prices to float. A power shortage and a surge in demand boosted prices in some cases to more than 100 times previous levels. The companies defaulted on maturing debt and delay payments to suppliers to conserve cash and stave off bankruptcy.

Coram is pushed to the brink, O'Sullivan said, with one month's worth of cash remaining and missed Edison payments of $350,000. That amount "to me is a fortune," he said. "We're fed up, we would like this to go away."

The five other energy producers and the amounts they are owed are listed on the petition, O'Sullivan said, and the companies are reviewing it. He declined to identify them.

Southern California Edison wasn't aware of any petition so wouldn't comment on it, a spokesman for Edison International, the utility's parent, said. "Southern California Edison continues to do everything it can to avoid bankruptcy, as it isn't in anyone's best interest, and we intend to pay all our bills," the spokesman said.

Some analysts doubted whether the power suppliers would do more than sign a petition.

It's possible "they are just trying to get the state to move faster" by raising the prospect of a filing, Patterson said Paul Patterson, an analyst at Credit Suisse First Boston.

Coram's owner said he signed the petition because he is travelling for the next two weeks, and will decide when he returns whether to take the matter further if others sign.

Other smaller generators will "decide in the next week or two" whether to sign themselves after seeing if state leaders can craft a rescue plan for the utility, O'Sullivan added.

An involuntary bankruptcy petition doesn't guarantee a company will end up in bankruptcy, Imperial's Gubner said, and a judge would hold a hearing 20 days or later after such a filing. California and the utilities would have time to finish negotiations by then, analysts said.

A bill stalled in the California Legislature on Wednesday that would help the state's cash-strapped utilities pay bills owed to the alternative power producers.

It isn't clear what Coram would recover on past bills in a bankruptcy action, but going forward "we become a preferred provider for everything we deliver" and would get paid ahead of other creditors, O'Sullivan said.

The two utilities have been negotiating with banks, which hold more than $1.77 billion in loans, to keep them from demanding repayment of loans, which would accelerate involuntary bankruptcy petitions from other creditors.

On Wednesday, U.S. District Judge Lloyd George in Las Vegas allowed Caithness, with two geothermal plants in Nevada, to place a lien on Southern California Edison's 56 percent stake in the $530 million Laughlin plant. Caithness sued the utility for about $20 million, or three months worth of delinquent payments, and said it faces insolvency if it isn't paid, Credit Suisse's Patterson said.

Unsecured creditors, including other QFs, electricity suppliers including Enron Corp. and Duke Energy Corp., commercial paper, note, and bond holders, will lose access to that collateral if the lien is upheld and a bankruptcy filing occurs.

"Clearly some of the commercial paper holders hadn't taken it into account and didn't realize the ramifications of it," said Jonathan Rosenthal, a partner at Saybrook Capital LLC in Santa Monica, California. Saybrook yesterday organized a conference call of 75 holders of more than $700 million of commercial paper sold by the utilities.

Unsecured creditors aren't allowed to petition courts for liens on utility property in California, which is why Caithness chose Nevada, analysts said.

The move by Caithness may precipitate the utility to file for bankruptcy protection in order to protect its assets, analysts said. Edison said it would appeal the ruling.

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