PG&E; Corp. Borrows $1 Billion to Pay Debts
Faced with jittery creditors, the parent company of California’s largest utility, Pacific Gas & Electric Co., took dramatic steps Friday to protect itself from being dragged into Bankruptcy Court but did nothing to prop up its debt-ridden subsidiary.
After disclosures that PG&E; Corp. had secured a $1-billion loan to pay its own creditors, Wall Street credit rater Fitch Inc. warned that the company’s San Francisco-based utility was facing the “near-term possibility of bankruptcy.”
But state and utility sources said PG&E; Corp. is still hoping to reach a rescue accord with Gov. Gray Davis that would involve the sale of its valuable transmission lines. A spokesman for the company denounced Fitch’s warning as “irresponsible.”
As aides to Gov. Gray Davis continued to negotiate with PG&E;, sources said the utility earlier this week presented a proposal that put its massive transmission system on the table in exchange for the state’s financial help.
A state takeover of the grid is a fundamental part of Davis’ attempt to avert the utility’s bankruptcy while providing Californians with a new and potentially valuable asset. Although the state’s other teetering utility, Southern California Edison, had recently agreed in principle to sell its portion of the grid for $2.76 billion, PG&E; had been holding tight.
Some in the administration greeted PG&E;’s proposal with optimism. But an accord remains far from certain. Basic elements have yet to be resolved, such as how much the utility wants for its portion of the grid and what other concessions the company and state will make.
“It’s at a very delicate stage,” said one source close to the negotiations.
Significant details remain to be resolved even with Edison and the smallest of the state’s three utilities, San Diego Gas & Electric, which the governor believes will sell its piece of the grid for about $920 million.
Davis spokesman Steve Maviglio said he does not expect PG&E;’s financial maneuvering on Friday to affect the talks.
“The governor has always said he expects the parent companies to make a significant contribution to the utilities as part of a final deal and we will continue to press for that,” Maviglio said.
The utility’s creditors are not so optimistic.
The $1-billion loan that parent company PG&E; Corp. obtained Friday from GE Capital and Lehman Bros.--offering a profitable subsidiary as collateral--will not be used to repay any of the utility’s debt, estimated at more than $8 billion.
PG&E; executives said the company moved to protect itself because of the recent formation of creditor committees, which could have forced both the far-flung company and its local utility into involuntary bankruptcy. Now only the utility is vulnerable.
Fitch Inc., one of three major firms that rate the credit worthiness of companies, said late Friday that the “failure to promptly resolve the numerous issues at the utility subsidiary could make bankruptcy a near-term possibility.” Fitch said it was downgrading the utility’s credit rating to “watch-negative” from “watch-evolving.”
PG&E; Corp. spokesman Greg Pruett denounced Fitch, saying: “It is really regrettable that this individual at this agency felt a need to put this information out, which, candidly, is misleading. It assumes facts not in evidence.”
Pruett said utility executives “are pulling out all the stops to get a resolution in Sacramento. . . . We remain encouraged that ultimately, that is going to occur.”
Throughout the state’s energy crisis, Fitch has generally been the first of the Wall Street credit firms to issue warnings on the utilities’ finances. But the other two major ratings players--Moody’s and Standard & Poor’s--have ultimately followed suit.
Gary Ackerman, executive director of a group representing power generators who are among PG&E; creditors, said Fitch’s move suggests that Davis’ visit with financial analysts in New York on Wednesday left them nervous.
“I can only speculate that Davis’ visit was not enough to make Wall Street analysts comfortable that the bailout option as proposed by the governor is good enough,” said Ackerman, of the Western Power Trading Forum, some of whose members are owed hundreds of millions by PG&E; and Edison.
“We might have two situations here, where Edison stays out of bankruptcy and PG&E; goes in,” Ackerman said. “We all presume that what one does, the other does--and that might not be the case.”
An Edison source said Friday it was a stretch to infer from PG&E;’s loan deal that the company’s utility was heading toward bankruptcy. But if it should, he said, Edison could still reach a settlement with the state, perhaps using assets other than its transmission grid. “We want to be part of the solution,” he said.
Unlike PG&E; Corp., Edison International has not defaulted on any of its debts, although its Rosemead-based utility announced that it has missed $711 million more in payments to electricity suppliers.
Executives of PG&E; Corp., the parent company, said Friday that, with its new cash infusion, it can now repay debts on which it had defaulted and give the holding company enough cash to continue operating for as long as three years without any financial contribution from the utility.
“The defaults created the risk that the corporation might face a bankruptcy in the near future, and bankruptcy of the corporation would benefit no one,” PG&E; Corp. Chief Executive Robert D. Glynn Jr. said in a statement.
PG&E; will use the loan to repay $501 million of commercial paper, a form of short-term business IOU, $434 million of credit line borrowings and $116 million in fourth-quarter dividend payments to stockholders. The company said it will attempt to make quarterly interest payments on commercial paper issued by the utility.
PG&E;’s stock leaped 64 cents in the final three minutes of trading Friday on the New York Stock Exchange after the debt refinancing was disclosed, closing at $14.50 per share, up 51 cents. Shares of Edison International rose 6 cents to close at $14.91.
“This is one more step in the right direction,” said Douglas Christopher, a utility analyst with Crowell, Weedon & Co. “They certainly need the liquidity but it also suggests there are lenders that are still willing to lend to them, maybe because they see some progress.”
Utility analyst Paul Patterson of Credit Suisse First Boston Corp. said the move is a good one for PG&E; Corp. shareholders because it indicates that some value would remain there even if the utility filed for bankruptcy-law protection.
But utility debt holders were upset during a conference call with PG&E; Corp. executives on Friday.
“They clearly felt they had been left at the station,” Patterson said.
The parent company’s move also angered consumer advocates, who have repeatedly called on PG&E; Corp. and Edison International to sell assets to pay off part of the $13 billion in electricity debts that the two utilities have amassed. Because of a freeze on rates charged to consumers, the utilities have been unable to pass along high wholesale electricity costs to customers.
Harry Snyder, senior advocate with Consumers Union, compared PG&E; Corp.’s borrowing $1 billion to repay creditors and give shareholders a dividend “a finger in the eye of Gov. Gray Davis.”
“They didn’t use any of their new loan to pay off the debt of their subsidiary, leaving the taxpayers of the state of California to pay it off,” Snyder said. “These guys just have no ethics.”
Meanwhile, for the fourth time since January, the California Department of Finance on Friday asked the state Legislature to let it spend another $500 million in general tax money to purchase power--pushing spending by the state to at least $3.2 billion.
The state began buying power in December when utilities fell so deeply into debt that wholesale power producers and marketers no longer would sell them electricity.
California is buying power under a law signed by Davis in January, allowing the state to enter into long-term contracts to purchase power in hopes of driving down costs by avoiding the volatile open market. So far, the state has had a hard time entering into the contracts, and in the meantime, the hit on the budget has been dramatic.
There are, however, signs that the money drain is--ever so slightly--slowing down. The last three requests by the Department of Finance for $500 million infusions have each lasted one day longer than the one before--from eight to nine to 10 days.
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Power Points
Background
The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.
Daily Developments
* PG&E; Corp. secured a $1-billion loan to pay its own creditors in hopes of protecting itself from bankruptcy, but did nothing to rescue its debt-ridden subsidiary, PG&E.;
* PG&E;’s stock leaped 64 cents in the final three minutes of trading Friday on the New York Stock Exchange after the debt refinancing was disclosed.
* State and utility sources said PG&E; is still hoping to reach an accord with Gov. Gray Davis that would include the sale of the utility’s transmission system.
Verbatim
“Failure to promptly resolve the numerous issues at the utility subsidiary could make bankruptcy a near-term possibility.”
--Fitch Inc., a Wall Street credit rater
Complete package and updates at www.latimes.com/power
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Times staff writers Nancy Vogel and Nancy Cleeland contributed to this story.
