Utility Bankruptcy Could Cause Havoc Creditors may lose big in power crisis by Sam Zuckerman San Francisco Chronicle, January 18, 2001 Financial shock waves will be felt far and wide, from the nation's largest banks to schoolchildren in Orange County, if California's two big electric companies file for bankruptcy. Southern California Edison and Pacific Gas and Electric Co. filings would be the largest and third-largest bankruptcy cases, respectively, in U.S. history, involving a combined $20 billion in debt. Creditors, especially ones whose loans aren't backed by collateral, would face potentially irrecoverable losses. And the ripple effects from the bankruptcies would shake markets around the world, analysts say. "Either one of these would be a huge case by itself," said Lynn LoPucki, a law professor at the University of California at Los Angeles. "Together, they surpass anything we've ever seen. This is putting more creditor dollars at risk than any bankruptcy in history." Edison and PG&E are selling electricity at prices far below their costs, a situation they say will force them to seek court protection from their creditors within weeks unless political leaders bail them out. The danger was highlighted in the past few days as the two companies defaulted or said they would default on hundreds of millions of dollars in debt coming due. The list of creditors owed money by the utilities is long. It includes power suppliers, banks and thousands of institutional, governmental and individual investors who hold bonds or other debt securities. The outcome of bankruptcy is uncertain since a solution to the utilities' business problems depends on political action. A state or federal bailout could save the utilities, but there is no guarantee that it would protect the interests of creditors. "If there is a political rescue, there could be enough money to keep the utilities operating," said LoPucki. "But if it's just enough to keep them operating and no more, that wipes out the debt holders." The trauma of bankruptcy would be compounded by one overriding fact: Utilities, unlike, say, casinos or airlines, aren't expected to renege on their debt. "It's an extremely rare thing," said Jacob Mercer, a utility debt analyst at US Bancorp Piper Jaffray. "Only two publicly traded electrical utilities have declared bankruptcy since the Great Depression, and both of those involved nuclear power." Among those who could be hit hardest are individual investors, who don't have the resources to diversify their portfolios. Mercer said he has fielded frantic calls from small-time investors who bought utility bonds to play it safe. "There are lots of ma's and pa's who own these bonds,'' he said. In the days before California's power market was deregulated, utilities had captive markets and guaranteed profits. Their bonds and other debt securities were considered among the safest places to put money. "These are the kinds of investments you sold to widows," said Orange County Treasurer John Moorlach. "Utility companies were no-brainers." Orange County is already one of the victims of the utilities' financial plight. The bond rating service Fitch downgraded the county's school investment pool yesterday because of its vulnerability to a utility default. Orange County holds about $40 million of Edison debt securities in a fund that supports local school operations, representing about 3.3 percent of total assets. If the county's entire Edison investment were lost, the yield in the school fund would be cut from more than 6 percent to less than 4 percent, Moorlach calculated. That would cut to support local schools by millions of dollars. There is a special irony to Moorlach's dilemma. Orange County itself went through a bankruptcy crisis in the mid-1990s because of investments that went sour. Moorlach was elected county treasurer on a platform that stressed prudent investment management. Moorlach said he bought Edison debt securities precisely because he considered it safe. "We buy prime paper only," he said. "We've been very cautious." Banks, for their part, have lent about $2.2 billion to PG&E and Edison, the brokerage firm Salomon Smith Barney estimates. Bank of America, the nation's third-largest bank, led a group of financial institutions that extended an $850 million credit line to PG&E last year, while J.P. Morgan Chase, the No. 2 bank, was leader on a $1 billion Edison credit. Defaults and downgrades by debt rating agencies have put the utilities out of compliance with terms of the loans, making the credits immediately due in full, bankers said. Bank of America and Morgan Chase declined to comment on their loans to the California utilities. BofA's Chief Financial Officer James Hance told analysts earlier this week that the bank projects that it will write off $3 billion in delinquent credits in 2001 and that amount should cover any bad loans to utilities. Most big institutions say they have diversified their holdings to avoid being hurt by bankruptcies. The California Public Employees' Retirement System has just a little more than $8 million of PG&E and Edison debt in its $46.6 billion fixed income portfolio. Utility bankruptcies "are not going to bring us down," said spokeswoman Pat Macht. One special area of concern is money market mutual funds, considered one of the safest investments because they promise investors that they will try to keep shares at $1. Standard & Poor's analyst Peter Rizzo said he doesn't expect any of the 400 money funds he follows to take a big hit, but some have had to scramble to unload California utility debt to keep shares at $1. "None of our rated funds is in danger of breaking a dollar," Rizzo said. "But some of them had exposure (to Edison and PG&E) larger than 1 percent and there is only a 0.5 percent margin of error. They were getting out of this." Meanwhile, PG&E and Edison debt securities have plunged in value, with bonds secured by real estate trading at 80 cents on the dollar, while unsecured debt fell to 50 cents. Analysts said few bonds are actually changing hands because buyers have become scarce. "The problem is no one knows what these securities are really worth," said Jon Kyle Cartwright, a debt analyst with the brokerage Raymond James & Associates. "Under the existing situation, it is difficult, if not impossible, to value these companies." ___________________________________________ Gas Supplies Ordered in California By H. JOSEF HEBERT .c The Associated Press WASHINGTON (AP) - President Clinton signed a memorandum Friday declaring a ``natural gas supply emergency'' in central and northern California, allowing the Energy Department to order suppliers to keep gas flowing into the state. Energy Secretary Bill Richardson, acting on the president's directive, issued an emergency order requiring companies to continue supplying natural gas to California to ensure adequate supplies. Richardson called the power supply situation in California ``precarious'' and said the action was taken to ensure that one of the state's financially strapped utilities, Pacific Gas & Electric, have fuel at several of its power stations. ``Concerns about PG&Es financial status have caused several of the utilities' natural gas suppliers to cut off or threaten to cut off services,'' said Richardson. Such supply disruptions ``could endanger the health and welfare of ... residential and commercial gas customers and could exacerbate the already precarious condition of California's electric grid.'' PG&E has said that if it were cut off from its suppliers many areas would lose electricity for as long as 12 hours a day and hospitals, fire stations and other emergency services also would be affected by shorter blackouts. The president ``has directed me to initiate the (gas) order ... to protect the people of California's (and) to make sure there's enough natural gas supplies,'' said Richardson. The order will remain in effect until Tuesday night. Richardson said he had discussed the matter with incoming energy secretary Spencer Abraham. Whether the order will be extended beyond Tuesday will then be up to President-elect Bush .... [[When first asked by TV media about his reaction to the energy crisis in California, President-elect Bush visibly smirked, as if the matter were funny. It's THEIR problem, he said, in effect. "California got itself into this mess, let it get itself out of it." It was the result of "bad laws" passed by California legislators, Bush said --the ones, by the way, who were steamrolled into deregulation of the industry by REPUBLICAN lobbyists, such as Bush's buddy and largest political contributor, Lay of ENRON, the natural gas giant-- and with predictable sleight of hand, he blamed "environmentalists" for the problem. [[Bush's visible glee on hearing of largely Democratic California's misery and likely economic collapse was so obviously vindictive that Sen. Diane Feinstein implied, and Oakland CA mayor Jerry Brown outright stated, that Bush thought of it as "revenge" -- against the liberal monolith that voted AGAINST him, for Al Gore, in the presidential election. (No one has yet dared, however, to accuse Republican oil and gas barons --like the head of Enron, supplier of the exorbitantly priced natural gas that's sold to California's electrical power suppliers, who can scarcely afford it anymore-- of having deliberately CAUSED the "power crisis."]] He said he believes that Abraham is ready to deal with the California power crisis. ``I briefed (former) Senator Abraham. His team is ready. I'm convinced we've coordinated well,'' he said. Earlier in the week, the Energy Department extended for another week its order requiring wholesale power companies to supply California with electricity. The state most of this week has faced an electricity crunch prompting rolling blackouts in the northern half of the state. Utilities also have stopped providing power to hundreds of companies that under their long-term contracts agreed to be cut off in exchange for lower rates.
