Where things now stand with PGE

How can a bankrupt company have that much say over how their assets are distributed?

A CUB member who’s been paying attention to the saga of Portland General Electric in transition sent us the above question, in regard to Enron’s decision to end negotiations with the City of Portland over a purchase of PGE. We thought it was an excellent opening for a general discussion of where things now stand.

Enron Corporation, which purchased PGE back in July 1997 (exactly 8 years ago) no longer exists as an independent going concern. Enron filed for bankruptcy 3-1/2 years ago and is now subject to a reorganization plan approved by a U.S. bankruptcy court in New York. Stephen Forbes Cooper is a professional specializing in bankruptcy management hired by the Enron estate, who represents Enron and makes decisions on behalf of Enron (the estate) without having been an employee of Enron Corporation. Enron now exists to distribute its assets to its creditors.

Currently, the value of the creditors’ claims against the Enron estate is higher than the value of Enron’s assets. Creditors have been told to expect to receive between 15% and 30% of their claims. Since PGE is one of Enron’s remaining valuable assets (estimated net book value of slightly over $2 billion), there is much focus on both maximizing its value for creditors and also distributing that value to creditors as soon as possible. These goals, of course, played a significant role in the decision by Cooper to end discussion with the City of Portland over the purchase of PGE. Cooper and the rest of the group managing this bankruptcy have decided that stock distribution holds less risk than a potential City of Portland purchase. (The City being unwilling or unable to pay a $50 million surety on the deal was apparently one deciding factor in the end of negotiations.)

Within the next 6 months or so Enron will apply to the Securities & Exchange Commission (SEC) for permission to issue new common stock for PGE, equaling about 62 million shares. Once approved by the SEC, PGE will then issue those shares and will become an independently traded company on the stock exchange. It is expected that about 30% of the shares will be distributed directly to the creditors; the remaining 70% will be held in a Reserve to be overseen by Cooper for the settlement of remaining unresolved liabilities. Shares will continue to be released to creditors in chunks until the process is complete. As long as Cooper, as the Agent of Enron, holds a majority of stock, he also will have a majority voice in shareholder votes made on behalf of Enron and its creditors. This would include voting for Board Members and decisions regarding the sale of PGE to a third party, but not the day-to-day management decisions regarding PGE operations. By 2008, Cooper is expected to have distributed 70% of the shares and hold only 30% in Reserve, which would diminish his majority power but still remain a significant influence. The entire process could therefore go on for years, although the possibility exists for an entity to purchase PGE before the distribution is complete.

In the short term, we expect to see a turnover in the sitting Board of Directors for PGE by April 2006, concurrent with the stock issuance. This change in leadership offers an opportunity for either stabilizing current directions in PGE operations and management, or for making large changes.

The bigger issue surrounding the future of PGE and its effects on customers is the upcoming repeal by Congress of the Public Utility Holding Company Act. PUHCA creates protections for customers against high-risk utility owners. When those protections are no longer in place, we expect a consolidation of electric utilities (as we have seen in the telecommunications industry), and this would likely mean the loss of PGE as a stand-alone, Oregon-headquartered company. If PUHCA is repealed, then PGE will probably be acquired by a larger entity and may become part of someone’s electric utility empire—not a healthy situation for the industry that is the backbone of our economy, since there could be a falling domino effect should the parent company get into financial trouble. Larger utility structures also exacerbate an already-existing problem of making utility companies pay attention to local issues like rates, quality of service and long-term energy policy.

Our options for the future of PGE are now fairly limited, at least in the short term. Enron has filed a request with the Oregon Public Utility Commission for approval of their stock distribution plan, hoping to sell shares on the open stock market. Beyond this proceeding, any buyer of more than 5% of PGE’s shares would have to file a separate application for approval; in this way, no one entity can gain a deciding interest in our utility without undergoing PUC scrutiny.

The PUC approval process is based upon looking at the benefits and risks to customers of any particular change of control in utility ownership. We take the law’s “net benefit” standard very seriously, and we will examine Enron’s filing looking for both risks and benefits. We will work to make sure that the final Commission order will further both the customers’ and the public’s best interest.
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