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Trial of PG&E Unit's Recovery Plan Begins

Kent Harvey, the utility's finance chief, is leadoff witness in Bankruptcy Court hearing on the proposed settlement.

November 11, 2003|From Reuters

SAN FRANCISCO — Pacific Gas & Electric Co.'s top financial officer laid out a recovery plan in Bankruptcy Court on Monday, as the trial opened for the big utility that sought protection from creditors during the state's energy crisis in April 2001.

Leadoff witness Kent Harvey, senior vice president and chief financial officer for the PG&E Corp.-owned utility, testified that the plan would pay off creditors, restore investment-grade credit ratings, reduce electricity rates over nine years and release a variety of legal claims.

The case, being heard by Judge Dennis Montali in U.S. Bankruptcy Court in San Francisco, is the largest bankruptcy of a U.S. energy utility.

The "confirmation" trial on the plan, based on a proposed settlement agreement negotiated last spring with the staff of the California Public Utilities Commission, is expected to continue into December.

In a separate regulatory review, the PUC is scheduled to vote on the deal Dec. 18.

The utility's goal is to emerge from bankruptcy in the first quarter of next year and resume dividend payments in 2005.

Harvey's testimony mainly covered details of the recovery plan -- paying off creditors with $2.5 billion in cash on hand, $8 billion in new debt and about $2.1 billion in additional financing spread over nine years.

But Harvey also provided an insider's grim view of the financial chaos that engulfed California's biggest utility late in 2000 and forced it to file for Chapter 11 protection the following spring.

Harvey said that by October 2000, he thought PG&E had a chance to recover from a rocky summer of blackouts and high energy prices that the utility could not pass on to customers under the state's deregulation scheme.

PG&E raised $2.7 billion in a successful debt sale, but in preparing a recommendation to directors on the dividend payment due January 2001, Harvey said he discovered "our world had changed."

The utility's "undercollection" -- the difference between its power costs and what it could collect from customers -- had spiraled out of control because of soaring energy prices, from $3.4 billion in October 2000 to $6.6 billion at the end of December 2000.

PG&E rushed to the PUC for an emergency rate increase but got only a 1-cent-a-kilowatt hour boost in January 2001 that couldn't be applied to past costs, which Harvey called "a disastrous" decision.

With its credit ratings plunging to junk bond levels, energy costs rising and the utility cut off from buying power, Harvey said he recommended that the January dividend be axed, the first omission of a quarterly payout in 84 years.

Bob Glynn, chairman, president and chief executive of parent PG&E Corp., and Gordon Smith, president and CEO of the utility, are not scheduled to testify but may be called by opponents to the plan.

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