Utilities' Bankruptcy: The What If's

California electricity power lines. Jan. 18, 2001
Even if California's destitute utilities go bankrupt the lights probably would stay on, but the financial shock could cause wide-ranging and long-lasting damage.

The bankruptcy specter looming over Pacific Gas and Electric Co. and Southern California Edison Co. for the past month during the state's power crisis could become a reality any day because they have no way to raise money to pay huge bills due early next month.

Filing for bankruptcy court protection would allow the utilities to protect their assets from creditors, but the desperate act almost certainly would devastate their already shell shocked shareholders and could also hurt employees.

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The bankruptcies would rank among the biggest business failures in U.S. history. PG&E's corporate parent ranked as the 73rd-largest company in the most recent Fortune 500 rankings, and SoCal Edison's was the 178th largest.

The lenders, bondholders and power generators that have advanced the utilities more than $11 billion to buy electricity during the past 7½ months probably would be forced to write off a big chunk of that debt as a loss.

And the taint of bankruptcy would tarnish the utilities' financial reputations for years, making it more difficult for them to raise money to upgrade transmission lines and plants.

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"If they go bankrupt, they may never get their credit ratings back to where they were," warned utility analyst Carol Coale of Prudential Securities in Houston.

Wall Street's major credit rating agencies already have downgraded PG&E and SoCal Edison to junk-bond status.

Even if the utilities manage to stay out of bankruptcy court, their credit ratings probably won't be restored to an investment-worthy level for two or three years, said Richard Cortright, an analyst for Standard & Poor's, the nation's most closely watched rating agency.

The utilities' customers probably would be among the least affected during the early stages of a bankruptcy proceeding because Chapter 11 of the federal bankruptcy code allows companies to continue operating while trying to dig out of their financial hole.

In addition, the federal bankruptcy judge overseeing the utilities' cases probably would do everything possible to make sure they fulfilled their legal obligation to deliver power to customers, according to veteran bankruptcy attorneys.

"A bankruptcy wouldn't make a huge difference from consumers' standpoint," predicted bankruptcy attorney Eric Nyberg of Oakland.

California's government leaders so far haven't been able to find a way to dig the utilities out of their hole, but "sometimes a bankruptcy is enough of a shock to the system that everyone finally wakes up and realizes that they have to fix the situation," said Richard Levin, a Los Angeles attorney who represented a bankrupt New Hampshire utility in 1988.

Some power producers hope the companies do file for bankruptcy, because they believe a bankruptcy judge would have a better chance of winning significant rate increases from the state, said industry analyst Tim Winter of A.G. Edwards & Sons.

A bankruptcy judge isn't likely to override state regulations and unilaterally raise customers' electricity rates, attorneys said.

"But a judge has the power of moral suasion and that can help get things done," Levin said.

Bankruptcy filings also could result in layoffs and pay cuts, said Wayne Silver, a Sunnyvale bankruptcy attorney. "Bankruptcy could open the door for renegotiating all labor contracts."

SoCal Edison already has outlined plans to lay off 1,850 workers to save money and PG&E has targeted 1,000 jobs.

Shares of stocks in the utilities' parent companies already have been battered. Since the end of November, PG&E Corp.'s stock has plunged by 63 percent, resulting in paper losses of $6.7 billion. Over the same period, Edison International stock has dropped 60 percent and wiped out $4.4 billion in shareholder wealth.

Both utilities also have suspended their quarterly dividends for the first time in their long histories.

Many utility shareholders bought the stocks to insulate themselves from wild price swings while padding their incomes with the dividends, said Silver.

"Suddenly these folks are staring out of the same bleak window as someone who bought stock in," Silver said.