Creditors Ready Plan for SCE Solvency
Even as Gov. Gray Davis prepares for one last stab at a rescue plan for Southern California Edison next week, a faction of influential creditors has started to map out its own reorganization plan for the insolvent utility.
“People have to be looking at fallback positions if the Legislature fails to act,” said Jonathan Weisgall, a vice president for CalEnergy Co., which the utility owes $108 million plus interest. “There are several ways to skin this cat.”
Weisgall, who is not part of the faction, said he remains hopeful that state lawmakers will approve an SCE rescue but that creditors realize political sentiment in Sacramento also may doom this final attempt.
The state Senate has balked at approving a plan that many members have described as overly generous to the utility. Davis says allowing the utility to go into bankruptcy would harm California’s economy, and he has ordered the Legislature to convene a special session Tuesday to reconsider an SCE rescue.
Anxious creditors may yet try to force SCE, a unit of Edison International, into bankruptcy; all it would take is for three such entities owed a combined $10,775 to file a petition. SCE has worked since April to avoid following PG&E; Corp.’s Pacific Gas & Electric unit into U.S. Bankruptcy Court.
But given the legislative impasse, one faction of creditors already is outlining a proposal that would attempt to restore SCE to solvency. The plan would tap the utility’s cash reserves, its improving cash flow from lower energy costs and its ability to issue notes to the firms its owes money, according to people familiar with the proposal who asked not to be named.
The company declined to comment on whether it would consider the creditors’ plan. Asked whether SCE would consider making partial cash payments to its creditors, spokesman Brian Bennett said: “We do not negotiate in the newspaper. If we do [negotiate], we will do it on our own.”
As of July 31, SCE said in a financial filing, it had $1.7 billion in cash and $3.3 billion in energy-related debts. Creditors believe the company’s cash position has improved since then. But the utility has said recently that it has piled up $3.9 billion in debt since May 2000, when wholesale electricity prices started rising sharply, and it could not recoup its costs because of a state-regulated freeze on customers’ rates.
Under the creditor proposal, SCE would immediately pay cash to those owed $100,000 or less. The utility would then pay at least 25% of its remaining energy debts in cash, and creditors would accept notes for 37.5% of what is owed them. The company would then use its improving cash flow to finance a bond offering to pay the rest.
A creditor working on the plan said these were preliminary percentages that could change through negotiation with SCE or as the utility provides more financial details.
Such a plan could be carried out under the authority of a bankruptcy judge or through negotiation with SCE, creditors said. They said it would require the approval of California’s Public Utilities Commission but not the state Legislature.
Aspects of the creditors’ strategy mirror the reorganization plan Pacific Gas & Electric filed Sept. 20 in Bankruptcy Court in San Francisco. The utility has a 60-day window to win the court’s confirmation but could seek an extension. PG&E;’s plan provides for repayment of $13.2 billion in creditor claims using cash and notes and without raising electrical rates.
Although SCE creditors are working on a reorganization plan, they believe the utility would initially have the upper hand in a bankruptcy because it has the first right to file a plan with the court.
So far, SCE has pursued a strategy with Davis in which the Legislature would pass a law earmarking a slice of customers’ electric bills to pay up to $3.5 billion in bonds. The money raised in the bond offering would be used to pay most of the utility’s energy debts. Under this approach, the utility anticipates that Wall Street would grant a favorable credit rating to such bonds because their source of repayment would be mandated by state law.
The PUC has authority to allow SCE to earmark a portion of customers’ bills to pay the debt on a bond issue. But experts say such a decision would not have the power of state law and could be reversed by a future commission, a possibility that troubles investors and corporate credit-rating agencies.
The creditors faction, however, says breaking SCE’s debts into pieces could result in a plan that would satisfy Wall Street.
A PUC official confirmed that the utility would be able to take some of the actions suggested by the creditors. “The cash they have on hand is a source of paying off some of this debt,” said Robert Kinosian, an advisor to PUC President Loretta Lynch.
Kinosian also said he believes that SCE could use some of its “headroom”--the difference between what it pays for electricity and what it collects in rates--to float a bond issue to pay creditors.
SCE pays about 5 cents a kilowatt-hour for about two-thirds of the electricity it distributes. But it collects about 10 cents a kilowatt-hour from its customers.
One risk in such a plan is that energy prices could reverse their recent downward trend, gobbling up the headroom and leaving no money to pay bondholders. But lower demand in a slowing economy, coupled with new power plant construction, is expected to keep prices steady, creditors and analysts said.
Edison International shares, which eased 10 cents to $12.22 on the New York Stock Exchange on Wednesday, have been trading in a narrow range since early July, awaiting a rescue plan.
