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Pacific Gas and Electric Co., its debts increasing by $300 million a month, filed for bankruptcy in San Francisco yesterday after deciding that bailout talks with Gov. Gray Davis were on the verge of collapse.
The bankruptcy filing -- the third-largest in U.S. history -- does not affect the utility's parent company, PG&E Corp., or any other PG&E division.
PG&E said it expects no disruptions in service to its 13 million customers. It also said it does not expect to lay off any of its 20,000 employees.
But the move could lead to substantially higher rates for consumers if a bankruptcy judge places PG&E's $9 billion in debt obligations on ratepayers.
"We chose to file for Chapter 11 reorganization affirmatively because we expect the federal bankruptcy court will provide the venue needed to reach a solution, which thus far the state and the state's regulators have been unable to achieve," said PG&E Chairman Robert Glynn.
"The regulatory and political processes have not provided a solution, and now we are turning to the court," he said.
The utility has 15 days to complete its bankruptcy paperwork. Federal Bankruptcy Judge Dennis Montali will discuss future steps with PG&E's lawyers at a May 8 meeting.
The Chapter 11 bankruptcy proceedings -- a mechanism for repaying creditors in the event of financial meltdown -- could last for years.
The governor called PG&E's decision "a real slap in the face to California."
He added that PG&E "dishonored itself and the creditors who had faith in the negotiation process that was under way."
Steve Maviglio, a spokesman for the governor, said Davis had been blindsided earlier in the day by the surprise bankruptcy announcement.
He said the governor's negotiators had met with PG&E's lawyers for about four hours on Wednesday and that the talks on restoring the creditworthiness of the utility were "ongoing" and "frank."
But Glynn said there have been "no face-to-face meetings for over three weeks."
"The negotiations we have been involved in since last November have gone nowhere," he said. "Over the last month, the kindest thing to say is progress has dramatically slowed."
PG&E's bankruptcy filing followed a televised speech by Davis on Thursday night in which he backtracked on past opposition to rate increases and acknowledged that bills will have to go up.
He also said a portion of the rate increase could be applied to paying off the debt of California's cash-strapped utilities.
Glynn said he and other PG&E executives listened closely to the speech but did not feel the governor went far enough in addressing California's energy woes.
"We've heard a lot of the words that have been involved but have not seen a lot of actions," he said. "The connection between words and action is the key."
An average 40 percent rate increase was approved by the state Public Utilities Commission last week and probably will be unaffected by the bankruptcy filing.
"We are committed to running the utility as well as we can," said Gordon Smith, PG&E's chief executive.
Power companies, which are partly responsible for PG&E's financial plight because of huge jumps in wholesale electricity prices, said they do not expect the utility's bankruptcy to affect their operations.
In fact, larger generators, which expect to be at the front of the line when a judge begins handing out cash to creditors, see PG&E's bankruptcy as a positive development.
"The Chapter 11 filing provides a defined process to collect our past receivables and keep PG&E in business going forward," North Carolina's Duke Energy Corp. said in a statement.
The state already purchases power on PG&E's behalf, and that will not change as a result of the utility filing for Chapter 11. The state has spent nearly $5 billion so far keeping California's lights on.
"Chapter 11 is the next chapter in this sordid economic blackmail," said Medea Benjamin of the San Francisco grassroots organization Global Exchange. "PG&E will get out of this without paying their debts, and they'll keep the parent company intact."
Nettie Hoge, executive director of The Utility Reform Network in San Francisco, speculated that PG&E may be attempting to pressure the governor to come through with a more generous bailout package.
"This is not a necessity," she said. "It's just a tactic."
Trading in PG&E's stock was halted before yesterday's announcement. When trading resumed in the final hour of the session, PG&E's share price plunged almost 37 percent to close at $7.20.
Shares of Edison International, parent company of Southern California Edison Co., also tumbled on the news, shedding almost 35 percent to close at $8.25.
Nevertheless, Edison CEO John Bryson said he does not expect PG&E's bankruptcy to affect his utility's parallel bailout negotiations with Sacramento.
"We at Southern California Edison continue to believe that working out a comprehensive solution to our current crisis is a preferable course to take," he said. "PG&E's decision does not change our position."
Edison tentatively has agreed to sell its power lines to the state for about $2.8 billion. Similar talks with PG&E have dragged on for months, with little if any progress.
PG&E has been poised to seek Chapter 11 protection for months. The company hired bankruptcy lawyers from the New York firm of Weil Gotshal & Manges last August.
Sources within the utility said yesterday's developments were carefully planned and orchestrated. Workers were first notified by an internal e-mail message sent out around 9:30 a.m.
This was followed 15 minutes later by an employee meeting in PG&E's corporate auditorium, at which Glynn and Smith reviewed the company's reasons for declaring bankruptcy. The two spoke with reporters by phone an hour later.
One worker, asking to remain anonymous, described the mood at headquarters as "somber" and said utility employees were concerned about how the move would affect their paychecks and benefits.
Other sources familiar with the utility's thinking said PG&E was never confident that an equitable deal could be reached with the state to address about $9 billion in debt accrued as a result of runaway wholesale power prices.
The utility has long insisted that it is legally entitled to recoup all its costs from consumers and was wary of any potential deal -- such as selling off its dams or transmission lines -- that did not include full recovery of past expenses.
PG&E has believed since last year that its best chance to erase its multibillion-dollar debt burden lies in bankruptcy court, the sources said.
Glynn said yesterday that, along with the collapse of talks with the governor, the decision to seek Chapter 11 protection stemmed from a PUC ruling last week changing the way PG&E and Edison tabulate their debt.
He said the ruling "created new payment obligations for the company and undermined its ability to return to financial viability."
A bankruptcy judge could order an end to the current rate freeze and demand higher rates for consumers. However, bankruptcy experts have voiced uncertainty as to whether a judge has the legal right to circumvent the rate- setting authority of state regulators.
David Huard, a partner at the Los Angeles law firm of Manatt, Phelps & Phillips, said he did not think a federal judge could order a state body to take action.
"But the PUC may feel compelled to raise rates to get the utility out of bankruptcy," he said.
The bankruptcy filing values the utility's assets at $24.18 billion and places total liabilities at $18.4 billion.
Peter Darbee, PG&E's chief financial officer, declined to specify how much of the utility's debt to creditors will be affected by the bankruptcy filing.
However, he said most outstanding payments are "unsecured," which means a bankruptcy judge could allot creditors any amount available. Many bondholders could be left with nothing.
PG&E said in its filing that Bank of New York holds $2.2 billion in unsecured debt and that Bank of America Corp. holds $938 million.
"It is our intent to pay all our debts in full," Glynn said.
What happened?
Pacific Gas and Electric Co. filed for Chapter 11 bankruptcy protection after amassing $9 billion in debt buying electricity during California's deepening energy crisis and realizing that bailout talks with Gov. Gray Davis were doomed to fail. The bankruptcy filing was the largest involving a utility in U.S. history.
What's the impact?
-- On consumers: The company said it does not expect any disruption in service to its 13 million customers. Power companies that supply PG&E with electricity said they don't expect the bankruptcy filing to affect their operations.
-- On investors: Trading in PG&E stock was halted before the bankruptcy action was announced. After trading resumed, the company's stock fell 36 percent and closed at $7.20 a share.
What's next?
PG&E has 15 days to compile the legal documents needed to proceed with bankruptcy and appear before a federal judge to begin bankruptcy proceedings.
The five largest bankruptcy filings (based on prefiling assets) since 1980:
-- Texaco Inc.:
$35.8 billion (April 12, 1987)
-- Financial Corp. of America:
$33.8 billion (Sept. 9, 1988)
-- PG&E:
$24.2 billion (April 6, 2001)
-- MCorp:
$20.2 billion (March 31, 1989)
-- First Executive Corp.:
$15.1 billion (May 13, 1991)