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Deregulation or Bust?

Fortnightly Magazine - May 15 1995

can enforce their terms. Creditors that elect not to accept the out-of-court restructuring agreement cannot be bound by its terms. Thus, even if an overwhelming majority of all creditors and bondholders agree to restructure their respective debts, the dissenters (and abstainers) can still enforce all their legal rights as if the restructuring did not occur.

The consensual nature of exchange offers becomes an almost insurmountable obstacle in the electric industry, where utilities commonly use multiple issues of publicly held, widely distributed bonds to finance operations, and the number of constituencies involved in a financial restructuring is enormous. Moreover, traditional exchange offers, even if successful, would not impact the onerous contracts that often burden utilities. Thus, workouts/exchange offers may not be an effective restructuring tool in this industry.

Traditional Bankruptcy

Chapter 11 of the Bankruptcy Code is the other extreme: a company attempts to reorganize its affairs while under court protection from its creditors. The company's existing management continues in place and operates in the ordinary course of business. Examples of utilities that have been involved in Chapter 11 proceedings include Public Service Company of New Hampshire, El Paso Electric, Colorado-Ute, and Cajun Electric.

The most immediate impact of a Chapter 11 filing involves the "automatic stay," an injunction that comes into effect upon the filing of a bankruptcy petition and suspends most creditor actions against the company. This stay prevents, among other things, debt collection; property foreclosure; the setoff of claims against bank or other accounts, whether involving secured or unsecured debt; and general harassment by creditors seeking payment. Generally, the automatic stay does not enjoin regulatory action, although any rate changes in a bankruptcy plan must be approved by the regulatory authority that customarily sets that company's rates. Nevertheless, in the Cajun Electric case, the parties are litigating whether the automatic stay prevents the imposition of a rate reduction order issued by the Louisiana Public Service Commission. (The bankruptcy court enjoined a rate case for interfering with the reorganization process.)

The purpose of the automatic stay "breathing spell" is to provide the debtor with the time, free of creditor collection efforts, to reorganize its business and negotiate a restructuring plan that will be satisfactory to its creditor and equity constituencies.

Chapter 11 also gives the debtor the power to:

s assume, assign, or reject nearly any executory contract (that is, one with performance remaining on both sides) or unexpired lease, despite express terms in the contract or lease that prohibit such actions.

s treat any claim arising from rejection of an executory contract or unexpired lease as a prepetition general unsecured claim, which may be limited in amount under the Bankruptcy Code and paid less than in full under a plan of reorganization.

s borrow new money with superpriority status that can prime existing lienholders (provided that "adequate protection" can be demonstrated).

The first two powers may prove valuable to utility companies in connection with above-market, long-term power-supply contracts as well as construction and development contracts. For instance, a utility may be able to reject its contract to continue funding the