What the hell is double leveraging?

I've been asking myself this for a couple of weeks now (no thanks to my Corporations professor) because it seems to be the root of the big problem folks have with Texas Pacific's takeover of PGE.

Believe it or not, the Sunday Oregonian Business section has an excellent article outlining just what the hell it is, which makes it easy to see why it's so bad.

Basically, the plan calls for Texas Pacific to leverage it's buyout of PGE. This simply means that it is using debt to finance the takeover. In and of itself this is not a bad thing, plenty of mergers are leveraged and corporate debt is sometimes beneficial because it allows people to take risks. However, utilities usually do not have nearly as much debt as the Texas Pacific plans call for. The average is about 50% debt and 50% equity. PGE would end up with over 75% debt. Texas Pacific tries to make this more palatable by masking the debt through "double leveraging." This means it will create a separate holding company that will take on the debt required for the takeover. Meanwhile, PGE will only have the debt it currently already has. This supposedly reduces the risk to PGE customers because PGE is not technically taking on more debt.

So, what's the catch? The holding company's only source of income is the dividends it will supposedly receive from PGE. Since debt is first in line over shareholders, it's only going to get those dividends if PGE is doing strappingly well. Surprisingly enough, Texas Pacific forecasts that PGE is going to be doing swimmingly in the coming years. Funny, but my earlier posts on the weather and Bush's plans for the BPA aren't factored in. This means that if for some strange reason PGE doesn't recover from the recession and its Enron woes, the only way to raise enough money to pay off all this debt is to jack up our electricity bills. Hmmm.