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Enron Mail |
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Summary:
Late night efforts by the California assembly to craft a legislative solution are falling short of market and creditor expectations. Bankruptcy appears increasingly likely, but the dynamics of a Ch.11 proceeding remain unclear. SoCal Edison is likely to be the first in Ch.11 following its suspended payments to creditors yesterday and is now in a 30 day cure period. Attempts to bring in the assets of the parent companies are unlikely to succeed. Bankruptcy would provide Davis with some political cover to implement the tough decisions that he has so far avoided on the questions of rate hikes and other costs to taxpayers connected to the proposed operations of the California Power Authority. 1. Legislation Passes Assembly, But Generators and Consumers Remain Unhappy The first legislation (AB 1X) passed the California general assembly last night, but both generators and consumers are unhappy with the terms. Generators object to the 5.5 cent per KW/H price in the proposed long-term contract, while consumer groups such as the Foundation for Taxpayer and Consumer Rights object to the state acting as a purchaser of power. The legislation is expected to pass the Senate today and to be signed by Governor Davis as early as tonight. Press and source reporting this morning confirms that the principal financial creditors and utility analysts are also unimpressed with the bill, which is viewed as insubstantial and falling short of creating a solution to the financial pressures on the utilities. 2. Financial Institutions Exposure to California Utilities Bank of America: $215 million J.P. Morgan: $202 million There is a total of $12 billion in outstanding loans, but much of this (arranged by Societe General) is to the parents National Energy Group and Edison International. The $417 million mentioned above is the most immediate concern. The Southern California Edison loans are subject to immediate repayment in the aftermath of yesterday's rating downgrade to junk status. The Fed will not be involved, except in a routine way as a bank regulator making sure that the appropriate risk reserves are made against the utilities' loans and securities. There is no moral hazard here, because the Fed is not going to guarantee any of the utilities' credits, which, by the way, they do not have the authority to do. 3. PG&E/National Energy Group- Shielding Assets Despite considerable anger at PG&E for reorganizing to shield its profitable assets from its debt-plagued utility business, it would seem that Davis has little authority to intervene. The question of "fraudulent conveyance", which is a term in bankruptcy law for transferring assets to favored parties not long before a filing (which transfer can then be reversed by the court) would not seem to apply here, since PG&E went through a regulatory process before FERC to seek approval for the reorganization on Friday. While courts are reluctant to overturn regulatory agencies, impaired creditors in a bankruptcy proceeding could attempt an appeal. 4. Involuntary Bankruptcy- Which Creditor Moves First? As for who is likely to move first, it is typically the smaller creditors or those who won't receive a good price on post-petition business. In this situation our source does not know who that would be, but believes it is more likely that the utilities will file a voluntary petition before one of their major creditors files an involuntary petition. If Dynergy files a petition with a federal bankruptcy court today, the debtor utilities can delay the process for weeks if they choose to, particularly since there is no allegation of fraud or criminal misappropriation of assets. In bankruptcy proceedings (which is what is going on here), this sort of talk by a creditor such as Dynegy is just the usual "polite conversational opener," akin to comments about the weather or inquiries about one's family's health. 5. Edison Teetering on the Brink- Moves Into 30 Day Cure Period Yesterday, Southern California Edison temporarily suspended a $230 million bond principal and interest payments as well as $151 million to suppliers of renewable power and $215 million due to the California PX. Both utilities are under severe short-term debt pressure, but Edison is in the worst position. Edison Due Thursday: Dynegy note; Dynegy has threaten to take take Edison into bankruptcy court if they default PG&E Current available: $500M in cash and reserves Due Feb: 1st - $580M to ISO 15th - $431M to California Power Exchange Contrary to press reports and leaks from the Governor's office yesterday about political brinksmanship, Edison is clearly not playing negotiating games and is really short of cash. In this situation, it is unlikely that its executives will be making fraudulent statements. The bonds on which they failed to pay would have a 30-day cure period. After that the trustees will move on Edison, if Edison has not already filed. They have three ways of financing power purchases going forward: 1) the state continues to buy power and sell Edison (and PG&E) power on a short-term basis under existing authority; or 2) pending the passage of today's legislation, the state legislature authorizes the purchase of power through long-term contracts under the proposed borrowing authority; or 3) Edison files for reorganization under Chapter 11 and obtains almost immediately superpriority post-petition lines of credit secured against its unmortgaged assets, which it uses to pay for power until the PUC and the rest of the state government recognize that rates have to increase. 6. New Hampshire Experience A Guide for Davis? Following the bankruptcy of the Public Service Company of New Hampshire, the bankruptcy judge was authorized by a higher court to mandate rate hikes. The prospect of imposed rate hikes from the bankruptcy court caused the state government to subsequently determine that rate hikes to consumers were unavoidable, passing a seven year rate hike of 7.5 percent. For Davis, a similar scenario would provide him with some political cover, if he were forced by the bankruptcy court to pass through rate hikes as part of a settlement.
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