ML021980477
| ML021980477 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 07/10/2002 |
| From: | Nexon J Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Pacific Gas & Electric Co |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Bankruptcy Court, Northern District of California |
| References | |
| 01-30923 DM, 94-0742640 | |
| Download: ML021980477 (10) | |
Text
1 2
3 4
5 6
7 8
9 10 11 12 HOVRD 13 RK*E SI1 4
16 17 18 In re PACIFIC GAS AND ELECTRIC COMPANY, a California corporation, Debtor.
Federal I.D. No. 94-0742640 I Case No. 01-30923 DM Chapter 11 Case Date:
July 30, 2002 Time:
1:30 p.m.
Place: 235 Pine Street, 22nd Floor San Francisco, California Judge: Hon. Dennis Montali NOTICE OF MOTION AND MOTION OF PACIFIC GAS AND ELECTRIC COMPANY FOR ORDER AUTHORIZING USE OF CASH COLLATERAL TO FACILITATE COMPLIANCE WITH APPLICABLE LAW; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF
[SUPPORTING DECLARATION OF HUDSON T. MARTIN FILED SEPARATELY]
PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL JAMES L. LOPES (No. 63678)
JANET A. NEXON (No. 104747)
KENNETH A. NEALE (No. 126904)
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 Telephone:
415/434-1600 61b 3 Facsimile:
415/217-5910 Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION 19 20 21 22 23 24 25 26 27 28
1 2
3 4
5 6
7 8
9 10 11 12 HOVZ4M 13 RIcE cAN 14
- ?RAflKIN ARjCa.=. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION PLEASE TAKE NOTICE that on July 30, 2002, at 1:30 p.m., or as soon thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Montali, located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric Company, the debtor and debtor in possession in the above-captioned Chapter 11 case
("PG&E" or the "Debtor"), will and hereby does move the Court (the "Motion"), for an order pursuant to Bankruptcy Code Sections 363(b)(1) and 364(d) (11 U.S.C. §§363(b)(1) and 364(d)) authorizing PG&E to use cash collateral in order to obtain bonds or letters of credit, or to fund escrow and/or trust accounts, all as necessary to comply with California Civil Code Section 3110.5 with respect to certain PG&E construction projects, to meet certain state-imposed environmental regulations, and for other, miscellaneous purposes, all as more fully described below.
The Motion is based on this Notice of Motion and Motion and the Memorandum of Points and Authorities set forth below, the supporting Declaration of Hudson T. Martin
("Martin Declaration") filed herewith, the record of this case and any admissible evidence presented to the Court at or prior to the hearing on this Motion.
PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1(c)(2) of the Bankruptcy Local Rules of the United States District Court for the Northern District of California, any opposition to the Motion and the relief requested herein must be filed with the Bankruptcy Court and served upon appropriate parties (including counsel for PG&E) at least five (5) days prior to the scheduled hearing date. If there is no timely objection to the requested relief, the Court may enter an order granting such relief without further hearing.
PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
2 3
4 5
6 7
8 9
10 11 12 HOV44M 13 RIE 15 16 17 18 19 20 21 22 23 24 25 26 27 28 MEMORANDUM OF POINTS AND AUTHORITIES I.
FACTUAL BACKGROUND' A.
General Background PG&E is an investor-owned utility providing electric and gas services to millions of California residents and businesses. On April 6, 2001, PG&E filed a voluntary petition under Chapter 11 of the Bankruptcy Code. PG&E continues to manage and operate its business and property as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.2 No trustee has been appointed.
From time to time, in the ordinary course of its business, PG&E is involved in construction projects for which PG&E must hire outside contractors for purposes of the construction. In its capital budget for the current fiscal year, PG&E has allocated substantial funds for capital expenditures, some of which are slated for construction projects for which PG&E will hire outside contractors. As described below, California has recently enacted a law which requires PG&E to provide security to the contractor for PG&E's payment obligations under certain construction projects. In order to provide such security, PG&E will need to use "cash collateral" within the meaning of Section 363 of the Bankruptcy Code. PG&E seeks authority to use up to $24 million of cash collateral for these purposes for projects commenced in 2002.
In addition, PG&E is required to provide certain financial assurances under applicable state and federal laws and regulations for environmental liability associated with closure remediation and/or post-closure monitoring and maintenance and third-party compensation. While PG&E formerly was able to self-insure such liabilities, it is currently
'The evidentiary basis and support for the facts set forth in this Motion are contained in the Martin Declaration filed concurrently herewith.
2Unless otherwise indicated, all statutory references in this Motion are to the United States Bankruptcy Code (Title 11 of the United States Code).
PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
not able to meet the state's requirements for self-insurance, and thus is required to either 2
provide escrow or trust accounts, letters of credit or bonds for such liabilities. PG&E could 3
have up to $30 million in such obligations over the next twelve months.
4 Finally, PG&E from time to time is required to provide financial assurances to
.5 various local, state and federal agencies in connection with the ordinary course of its 6
business. Where previously PG&E provided such financial assurances in the form of 7
performance bonds, it no longer has the ability to obtain such bonds on an unsecured basis.
8 In each instance, PG&E has determined that it will be required to post cash 9
collateral for the required financial assurance arrangements-either to the bonding company, 10 the letter of credit issuer, an escrow or trust account, or the direct beneficiary of the financial 11 assurance arrangement. In general, PG&E intends to use cash escrow accounts or trust funds 12 for these obligations whenever possible, as it believes that escrow accounts and trust funds HCVAM 13 represent the most cost-effective and readily available method for providing the necessary cvi 14 financial assurances.
NIC
&RABNN. 15 16 B.
California Civil Code Section 3110.5 17 California Civil Code Section 3110.5 is a new law which became effective on 18 January 1, 2002. The main purpose of this law is to protect contractors from the failure of an 19 owner to pay the amount required under a construction contract. The law requires an owner 20 who contracts for a private work of improvement for construction, alteration, addition to or 21 repair upon real property in an amount exceeding $5,000,000 (if the owner's interest is a fee 22 simple interest) or $1,000,000 (if the owner's interest is less than a fee simple interest), to 23 provide one of three specified forms of security for the project. The security must be in the 24 form of (i) a payment bond from a California admitted surety meeting certain credit 25 requirements; (ii) a letter of credit from a financial institution; or (iii) a cash payment to an 26 escrow account maintained in California in which the contractor would have a first priority 27 security interest. The law requires collateral in the amount of 25% of the total amount of the 28 contract if the contract is scheduled to be substantially completed within six months of PG&E's MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
commencement of the work, or 15% of the total amount of the contract in all other cases.
2 In the event that PG&E decides to use a payment bond or letter of credit to meet 3
its obligations under Section 3110.5 with respect to a particular construction contract, PG&E 4
has determined that it will have to post cash collateral to secure its obligations to the surety 5
or financial institution issuing such instrument. The use of an escrow account in which the 6
contractor would have a security interest also would require PG&E to use cash collateral, but 7
would be less expensive than the bond or letter of credit alternative arrangements.
8 9
C.
Environmental Regulations.
10 Under state and federal regulations, certain financial responsibility requirements 11 are imposed on entities such as PG&E for environmental liability associated with 12 remediation, third party compensation, closure, and/or post-closure monitoring and HOM 13 maintenance. 3 For example, PG&E is required to place $4,425,997 in trust for the benefit of NX 14 the State of California Department of Toxic Substances Control for the Diablo Canyon
&RAGNC 15 Power Plant and the Martin Service Center by August 1, 2002. The trust is designed to 16 cover closure and post-closure cost estimates and third party compensation for bodily injury 17 and property damage, at certain sites. Further, on or before August 1, 2002, PG&E must 18 place $1,010,000 in trust for the benefit of the State of California Water Resources Control 19 Board for third party compensation at petroleum underground storage tank sites (pursuant to 20 the Code of Federal Regulations, Title 40, Part 280, Subpart H and the California Code of 21 Regulations, Title 23, Division 3, Chapter 18, Article 3). PG&E anticipates that a number of 22 other, similar requirements may be imposed in the future.
23 24 D.
Miscellaneous Cash Deposits.
25 In addition to the categories set forth above, PG&E anticipates that it will need to 26 27 3 Applicable financial responsibility requirements for closure, post-closure, and third 27 party compensation associated with hazardous waste facilities are contained in the California Code of Regulations, Title 22, Division 4.5, Chapter 14, Article 8.
28 PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
provide additional financial assurances in the nature of cash deposits for a variety of 2
different purposes. Examples of such purposes include requirements of governmental 3
agencies, counties and cities in connection with applications for special licenses and permits, 4
and requirements of the Department of Motor Vehicles in connection with the ownership 5
and operation of PG&E's vehicle fleet, and appeal bonds. Accordingly, PG&E further seeks 6
authority to make such miscellaneous deposits in an amount not to exceed $10 million over 7
the next twelve-month period.
8 9
II.
10 PG&E SHOULD BE AUTHORIZED TO ENTER INTO THESE FINANCIAL ASSURANCE ARRANGEMENTS PURSUANT TO 11 BANKRUPTCY CODE SECTION 364 12 PG&E seeks authority to post the cash collateral required by applicable state and 13 Federal law, as discussed above, under Section 364(d), to the extent applicable. Although NcýVAWa 14 the transactions for which PG&E seeks approval are not, strictly speaking, the "obtaining of RULK
&RAMON 15 credit" or "the incurring of debt" secured by a lien, as described in Section 364(d), PG&E 16 believes that these transactions, which involve the collateralization of obligations under 17 relevant state and federal law, are analogous to secured credit transactions under Section 18 364. To the extent that Section 364 is not applicable, PG&E also seeks authorization for 19 these transactions under Section 363(b)(1), as transactions outside the ordinary course of 20 business, as explained more fully in Section III below.
21 Bankruptcy Code Section 364(d)(1) provides as follows:
22 "The Court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on 23 property of the estate that is subject to a lien only if 24 (A) the trustee is unable to obtain such credit otherwise; and 25 (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is 26 proposed to be granted." (11 U.S.C. §364(d)(1)).
27 Thus, the only statutory prerequisites for obtaining credit on a senior secured 28 basis is that the debtor be unable to obtain such credit otherwise, and that there be adequate PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
protection for the existing lienholder. This test is clearly satisfied in this case. As discussed 2
above, PG&E is required under existing law to provide the financial assurances, in the form 3
of cash collateral or other credit assurance secured by cash collateral, and is unable to 4
provide alternative arrangements or to self-insure its liabilities, as it has in the past.
5 Further, the only existing potential lienholder, the indenture trustee for certain 6
mortgage bonds issued by PG&E (the "Indenture Trustee"), who holds a lien on substantially 7
all of PG&E's assets for the benefit of the mortgage bondholders, has informed the Debtor 8
that it does not object to the use of cash collateral in the manner described above. Moreover, 9
the Indenture Trustee's interest is fully secured and adequately protected by a substantial 10 equity cushion. In addition to its other substantial assets, the Debtor has over $4.2 billion in 11 cash on hand,4 while the outstanding obligation under the mortgage bond indenture is 12 approximately $3 billion.
13 In determining whether to approve a transaction under Section 364, courts act in NN 14 their '"informed discretion." In re Ames Dep't Stores, Inc., 115 B.R. 34, 37 (Bankr.
BU.K
,wa*pý 15 S.D.N.Y. 1990). Courts have established that such discretion is to be utilized to permit the 16 debtor's reasonable business judgment to be exercised so long as the financing agreement 17 does not contain terms that are primarily designed to benefit the secured party at the expense 18 of the estate or leverage the bankruptcy process. Id. at 39-40; In re Simasko Prod. Co., 47 19 B.R. 444, 449 (D. Colo. 1985). In undertaking such analysis, courts focus on the following 20 principal factors: proposed terms that would tilt the conduct of the bankruptcy case; 21 prejudice, at the early stages, to the powers and rights that the Bankruptcy Code confers for 22 the benefit of all creditors; or terms that leverage the Chapter 11 process by preventing 23 motions by parties in interest from being decided on their merits. In re Tenney Village 24 Co., 104 B.R. 562, 567-70 (Bankr. D.N.H. 1989); Norris Square Civic Ass'n v. St. Mary 25 Hosp. (In re St. Mary Hosp.), 86 B.R. 393, 401-02 (Bankr. E.D. Pa. 1988); In re Crouse 26 Group, Inc., 71 B.R. 544, 550-51 (Bankr. E.D. Pa. 1987).
27 4See Debtor's Monthly Operating Report for May, 2002, filed herein.
28 PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1
In this case, as discussed above, PG&E seeks to provide cash collateral to comply 2
with applicable state and federal laws and regulations. Such compliance is clearly in the 3
best interests of the estate and is not detrimental to parties in interest in this case.
4 Accordingly, the Court should authorize PG&E to post cash collateral or enter into 5
alternative arrangements (such as letters of credit or performance bonds) secured by cash 6
collateral under Section 364.
7 8
III.
9 PG&E SHOULD BE AUTHORIZED TO ENTER INTO THE PROPOSED FINANCIAL ASSURANCE ARRANGEMENTS 10 UNDER SECTION 363(b)(1) OF THE BANKRUPTCY CODE 11 The underlying transactions for which PG&E is seeking authority to enter into 12 financial assurance arrangements clearly would be within the ordinary course of PG&E's 13 business-i.e., construction of transmission and other facilities and the incurring of cmw 14 environmental obligations in connection with the conduct of its business. The only aspect of (YRAMNE 15 these transactions that deviates from PG&E's ordinary course of business is the requirement 16 for posting financial assurances in the form of cash collateral escrow accounts, cash 17 collateralized letters of credit, or cash collateralized performance bonds. As mentioned 18 above, PG&E has, in the past, been able to self-insure such obligations under prevailing laws 19 and regulations. Due to its Chapter 11 filing, PG&E is no longer eligible for such self 20 insurance. Accordingly, to the extent that this restriction transforms the transactions into 21 ones that require Bankruptcy Court approval, PG&E believes that it should be authorized to 22 enter into such transactions pursuant to Section 363(b)(1) of the Bankruptcy Code.
23 In determining whether to authorize a transaction under Section 363(b)(1), courts 24 require a debtor to show that a sound business purpose justifies such actions, applying the 25 "business judgment" test. See, e.g., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 389-90 26 (6th Cir. 1986); Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 27 F.2d 1063, 1071 (2d Cir. 1983); see also 3 Lawrence P. King, Collier on Bankruptcy 28
§363.02[l][g] (15th ed. rev. 1998).
PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL I
The burden of establishing a valid business purpose for a transaction outside the 2
ordinary course of business falls upon the debtor. See In re Lionel Corp., 722 F.2d at 1070 3
- 71. Once the debtor has articulated a rational business justification, however, a presumption 4
attaches that the decision was made on an informed basis, in good faith and in the honest 5
belief that the action was in the best interest of the debtor. See, e.g., Official Comm. of 6
Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 7
656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)).
8 As discussed in detail above, sound business justifications exist for PG&E to 9
enter into the proposed cash collateral arrangements, and such arrangements are now 10 required of PG&E under applicable state and federal laws and regulations. Moreover, as a 11 debtor in possession, PG&E is required to comply with applicable state law in the operation 12 of its property, pursuant to 28 U.S.C. Section 959(b).
13 RKE 14 IV.
BU*K 15 CONCLUSION 16 For all of the foregoing reasons, PG&E respectfully requests that this Court make 17 and enter its order:
18
- 1. Granting the Motion; 19
.2. Authorizing PG&E to use cash collateral in order to provide financial 20 assurances as described in the Motion, such as performance bonds, letters of credit, and 21 escrow and/or trust accounts, in amounts not to exceed (i) an aggregate of $24 million for 22 construction projects commenced in 2002, as necessary to comply with California Civil 23 Code Section 3110.5, (ii) an aggregate of $30 million in connection with environmental 24 obligations over the next twelve months, and (iii) an aggregate of $10 million for such 25 miscellaneous financial assurance arrangements as may be necessary in order for PG&E to 26 27 28 PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL comply with applicable state and Federal laws and regulations over the next twelve months; 2
and 3
- 3. Granting such other relief as the Court deems just and appropriate.
4 DATED:
/E:
, 2002 Respectfully, 5
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN 6
A Professional Corporation By:
,K-*
8 JANET A. NEXON 9
Attorneys for Debtor and Debtor in Possession PACIFIC GAS & ELECTRIC COMPANY 10 WD 071002/1-1419905/1004854/v5 11 12 HOWARD 13 RICE NIfftROVSMI 14 SAM(
16 17 18 19 20 21 22 23 24 25 26 27 28 PG&E'S MOTION FOR AUTHORITY TO USE CASH COLLATERAL 1