EnCal is a small, California-based power company specializing in power generation methods that use clean-burning fuels and renewable natural resources. However, due to California’s complex and confusing power pricing structure, EnCal is reeling from the aftereffects of the state’s attempt at power deregulation. EnCal has been unable to pass its operating costs on to its consumers. To make matters worse, EnCal has recently completed construction of several power production centers in efforts to double its capacity and to help diminish the frequency of power outages that are wreaking havoc on local commerce. As a result, it has accumulated a massive debt load to help finance these facilities and is on the verge of default. However, raising the prices of the power it supplies to its consumers involves a slow and laborious bureaucratic process and regulatory approval. EnCal is forced to reorganize its financing. EnCal’s partial income statements and balance sheets for the 2006 and 2007 fiscal years follow. An incomplete income statement for 2008 is also provided.

A financial restructuring that would reduce EnCal’s debt burden has been proposed. The proposal is to reduce the interest rate on its bank loan to 6 percent and loan principal to $100 million, to reduce the interest rate on its mortgage loans to 8 percent, and to replace all of its subordinated loan balance with a 50 percent equity stake in the company.
A. Assuming a 25 percent increase in revenue with no additional capital investment, what will EnCal’s new income statement and balance sheet look like in the business as usual and financial restructuring scenarios?
B. Will EnCal be able to service its debt under either scenario?
C. Would EnCal be a likely candidate for Chapter 7 bankruptcy?
D. Suppose the governor has called an emergency legislative session on the utility’s behalf to prevent its eventual bankruptcy. If the governor is able to get a bill passed supporting a rate hike on electrical power, how much must EnCal charge per kilowatt if it is going to be able to cover its interest payments under the new financial restructuring plan? Assume EnCal’s power generation facilities have a maximum capacity of 800 megawatts with an average capacity utilization of 50percent.

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INCOME STATEMENT (S MILLIONS Revenue COGS 170% in 2006, 80% in 2007/2008I Gross profit SG&A EBITDA Depreciation 2006 S240 168 2007 S 360 2008 5 72 30 Interest Eamings before taxes Taxes (40%) Net income 92 -85 BALANCE SHEET (S MILLIONS) Assets Cash Accounts receivable Inventories Fixed assets, net S 10 510 $550 15 1,080 1,135 Total assets Liabilities and Equity Accounts payable Notes payable (8% bank loan) Accrued liabilities (wages and taxes Long-term mortgage loans (10%) Long-term subordinated loans (12%) Common stock Retained eamings S 24 140 S 24 140 180 460 83 3 Total liabilities and equity 1,135