Message-ID: <30851243.1075857702410.JavaMail.evans@thyme> Date: Fri, 16 Feb 2001 13:54:29 -0800 (PST) From: johnston@enron.com To: john.lavorato@enron.com, a..shankman@enron.com, louise.kitchen@enron.com Subject: California 02/16/01 pt.2 Cc: john.nowlan@enron.com, gary.hickerson@enron.com, richard.shapiro@enron.com, vince.kaminski@enron.com, michael.bradley@enron.com, michelle.cisneros@enron.com, john.greene@enron.com, james.steffes@enron.com, mike.grigsby@enron.com, phillip.allen@enron.com, jeff.kinneman@enron.com, jaime.gualy@enron.com, kristin.walsh@enron.com, scott.tholan@enron.com, britt.whitman@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: john.nowlan@enron.com, gary.hickerson@enron.com, richard.shapiro@enron.com, vince.kaminski@enron.com, michael.bradley@enron.com, michelle.cisneros@enron.com, john.greene@enron.com, james.steffes@enron.com, mike.grigsby@enron.com, phillip.allen@enron.com, jeff.kinneman@enron.com, jaime.gualy@enron.com, kristin.walsh@enron.com, scott.tholan@enron.com, britt.whitman@enron.com X-From: Johnston, Robert X-To: Lavorato, John , Shankman, Jeffrey A. , Kitchen, Louise X-cc: Nowlan, John , Hickerson, Gary , Shapiro, Richard , Kaminski, Vince , Bradley, Michael , Cisneros, Michelle , Greene, John , Steffes, James , Grigsby, Mike , Allen, Phillip , Kinneman, Jeff , Gualy, Jaime , Walsh, Kristin , Tholan, Scott , Whitman, Britt , heizenrader@home.com X-bcc: X-Folder: \jlavora\California X-Origin: Lavorado-J X-FileName: jlavora.pst Our source reports the following regarding today's developments. In sum, due to the governor's sudden panic and resultant willingness to negotiate, all parties are in a wait-and-see mode that makes it unclear whether or not there will be an involuntary bankruptcy filing early next week. Our consensus view is that bankruptcy is still the most likely outcome, but the timing is subject to the ups and downs of these negotiations over the weekend. Creditors, especially the small IPPs are close to the end on forbearance and highly frustrated with the erratic nature of the negotiations. The events given in this report are chronological: - The original plan proposed by Governor Davis to the utilities this morning contained the following points: The parent companies of the utilities would have to return to their subsidiaries $1.5 billion. This money was originally tranferred to the parent companies ostensibly so that the parents could use it to pay taxes. However, as was revealed in the audit, this money was in excess of what was needed for taxes in reality. The state would purchase the transmission assets for $3.5 billion. It was proposed that the utilities would issue bonds to pay for the utilities' undercollection. These bonds would be secured against a "distribution charge" added to power bills. This money would be collected by DWR and transferred to the utilities, thereby involving the state, but with less than a "full faith and credit" commitment. - In contradiction to preliminary reports that appeared in the press, this plan was rejected by the utilities. One reason for this rejection was the low price on the transmission assets. - While the bondholders pressed for further negotiations at this point in order to see if a deal could be reached; this is because the bondholders are less impaired than the generators. The generators, however, demanded that they be paid the money they are owed and threatened to move quickly toward an involuntary bankrtupcy filing. - Local sources report that Governor Davis "panicked" at this point. He then offered to purchase the transmission assets for $6 billion (almost twice the earlier offer) and pay the generators' undercollection (which amounts to $9 to $12 billion). Reportedly, the suggested term of the bonds that would be used to pay for this bail-out was 15 years, which would nearly double the actual cost of the bail-out. This plan would be put forward as a emergency legislative bill. - At this point, consumer advocate Harvey Rosenfield entered into negotiations with the state treasurer's office. Rosenfield threatened that if the governor managed to pass this plan, he would start a referendum to counter it. Rosenfield would have up to 90 days after the emergency bill was passed to put his referendum in place. Knowledgeable sources advise that it would be "very difficult" for the bonds in the plan to be issued in less than 90 days; therefore, Rosenfield poses a credible threat. - In subsequent negotiations, Governor Davis has offered to purchase the transmission assets for a price of at least $6 billion, but possibly as high as $12 billion. - Senator President Pro Tem John Burton is 'very upset' with the governor for giving in on his negotiations so easily. - Mike Florio, another consumer advocate, contacted Gov. Davis and said that the idea of negotiating a bail-out, as it appeared Davis intended to do, was "ridiculous." Florio and the other consumer advocates threatened to ally themselves with Rosenfield and support the referendum if Davis pursued such a course of action. The consumer advocates strongly feel that the generators have to "take a hair cut" as part of the solution, as well. - The governor will announce later this afternoon a "framework" solution identical to that we have reported previously - a state purchase of transmission assets and an issuance of bonds by the utilities, but with state support through the DWR. However, the state government has yet to reach consensus on the numbers in this framework, and it remains unclear whether the framework will be acceptable to all parties. - With this announcement, the bondholders may refrain from an involuntary filing in order to see what the terms of the final agreement will be. The generators, while more inclined to file themselves, may feel that they have put enough pressure on the governor that it may be worthwhile to wait and see, as well. They are interested not only in the terms of the agreement (and particularly the amount paid for the undercollect), but also in the terms of the long-term power contracts that the state must negotiate. For example, if the state is willing to purchase power at high prices in order to placate the generators, they would be very likely to go along with the plan. -