Energy News

01/04 13:38 PG&E, Edison Shares Drop as Rate Increase Vote Nears (Update3) By Liz Goldenberg

San Francisco, Jan. 4 (Bloomberg) -- PG&E Corp. and Edison International shares plunged as investors questioned whether a proposed electricity-rate increase would be enough to keep California's two biggest utilities out of bankruptcy.

Shares of Edison fell $5.13 to $7.13, a 42 percent drop, in midafternoon trading, after touching a 52-week low of $6.25. PG&E slid $7.50, or 44 percent, to a 52-week low of $9.50. The Standard & Poor's Utilities Index, whose 26 members include PG&E and Edison, fell 8 percent after dropping 5.5 percent yesterday.

Moody's Investors Service and Standard & Poor's are indicating they will downgrade the utilities' debt if state regulators approve a proposal for a temporary 10 percent rate increase today. The Legislature is meeting in a special session called by Governor Gray Davis to address the crisis.

``The proposed amount doesn't come close to what the companies have spent,'' said Susan Abbott, a managing director in the public utilities group at Moody's.

PG&E and Edison say the proposed rate increase, which would stay in effect for 90 days, won't reassure creditors needed to supply cash for electricity purchases or let the utilities pay off $11.9 billion in debt they have incurred because of soaring power costs. Both have warned bankruptcy filings are possible.

The Legislature still may step in. A special session allows legislators to address issues immediately by making laws effective for 90 days after a majority vote.

Davis wants the Legislature, which convened yesterday, to write laws to fix the state's deregulated electricity market, increase supervision of power-plant operations, and provide low- cost financing for new plants.

``We still haven't seen whether the California Legislature really has the political will to address the problems,'' said Peter Rigby, a director in corporate and government ratings at S&P.

Generators' Shares

Shares of companies that sell electricity to California utilities also plunged on concerns they won't be able to collect from PG&E and Edison if the two companies go into bankruptcy.

``There is a possibility they're not going to get paid,'' said Gordon Howald, analyst with Credit Lyonnais.

Calpine Corp. fell $5.56, or 14 percent, to $32.94. Southern Energy Inc., the power-plant development unit of Southern Co., dropped $3, or 12 percent, to $22.81. NRG Energy Inc., a separately traded subsidiary of Xcel Energy Inc., fell $3.06, or 12 percent, to $22.38.

NRG Energy partnered with Dynegy Inc. to purchase a 951- megawatt gas fueled plant in Carlsbad, California, two years ago. Southern and Calpine both own plants near San Francisco they purchased from PG&E.

The proposed rate increase for San Francisco-based PG&E and Edison, based in Rosemead, California, ``didn't address how the companies'' might recover the money they've already spent and ``how the market might be reorganized to resolve this problem once and for all,'' Abbott said.

No Solution

Power prices soared this summer and winter in California because of flaws in the state's deregulation laws, a shortage of power plants, surging natural-gas costs nationally and bad weather that both increased power demand on the West Coast and reduced production from hydroelectric dams. The average power price in California quadrupled last year compared to 1999.

Pacific Gas & Electric Co., owned by PG&E, and Southern California Edison, owned by Edison, have to buy power on the state's open power market because they sold most of their power plants to help pay off debt, as was allowed under the state's deregulation law.

Regulators haven't permitted the utilities to pass the higher power buying costs on to customers, keeping in place a rate freeze that the 1996 deregulation law put in place from 1998 until March 2002.

Moody's won't announce a decision on whether to downgrade the companies' debt until the California Public Utilities Commission votes on a rate increase, Abbott said. S&P also said it won't have an announcement on the possible downgrades until commission votes.

The PUC has indicated it will vote on its staff's recommendation this afternoon. It can accept, reject or modify the proposal as it sees fit.

Lower Than Requested

Edison and PG&E asked the commission for increases of 30 percent and 26 percent, respectively, to keep them from running out of money and filing for bankruptcy.

Moody's put the debt of Southern California Edison and PG&E on watch for possible downgrade on Dec. 11. S&P put the debt on watch two days later. Since then, both companies have been unable to borrow in the short-term debt, or commercial paper markets, and have drawn on their back-up credit lines.

Today, Moody's put the California Power Exchange's ratings under review for a possible downgrade. The exchange is the state- run open market where the state's publicly traded utilities buy most of their power.

Last month, PG&E received permission to raise an additional $2 billion in long-term debt, which it hasn't been able to do because of the power crisis. Both companies have commercial paper maturing this month, power-purchase payments due, and said they may run out of cash before the end of January.

Bankruptcy Threat

In a filing with the Securities and Exchange Commission on Dec. 29, PG&E said many of its suppliers required upfront cash payments. This week Canada's British Columbia Hydro & Power Authority said it would stop selling power to the utilities.

``The average rate increase won't keep the wolf from the door,'' wrote Kit Konolige, a Morgan Stanley Dean Witter analyst in his update today. ``The threat of bankruptcy continues to rise,'' he said.

S&P said it would ``dramatically'' downgrade Edison's and PG&E's credit ratings today if the PUC approves an increase similar to the proposal, according to a report in the Wall Street Journal, citing Richard Cortright, a director at the company.

``A bankruptcy filing will hold off principal and interest payments that are due, as well as trade payables, but it doesn't address the principal on-going concern,'' S&P's Rigby said. ``Power purchase costs exceed retail rates,'' he said.

PG&E hired bankruptcy lawyers from Weil Gotschal & Manges of New York in August, the Wall Street Journal reported.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Energy%20News&s1=blk&tp=ad_topright_energy&refer=topsum&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_energy&middle=ad_frame2_energy&s=AOlTDNxSzUEcmRSwg

-- Cave Man (caves@are.us), January 04, 2001

Answers

http://www0.mercurycenter.com/partners/docs/018511.htm

Widespread criticism for planned power rate hike

Grim-faced officials with PG&E and Southern California Edison, who have lobbied for months for a sizable rate boost to stave off bankruptcy, also reacted to the proposal with disappointment.

``Banks will not lend on the basis of this proposed order,'' PG&E chairman Robert Glynn told the four members of the commission, predicting that his company will be forced into default on some of its debts within days.

Edison attorney Henry Weissmann went further, saying the plan gave him no choice but to ask the commission to officially excuse his company from its legal obligation to provide power for all its customers, because power suppliers may no longer be willing to sell on credit.

``We are deeply disappointed by the proposed decision,'' Weissmann said. ``We are extremely concerned that this decision will lead to shortages of electricity in California and blackouts for our customers.''

Edison spokesman Gil Alexander said the company's chief financial officer, James Scilacci, had been on the phone with Wall Street rating firms in the evening. They told him they intend to downgrade both utilities if the PUC's proposed decision is enacted today.

``Exactly what we predicted in these hearings, which the commission appears to have ignored, will apparently come true,'' Alexander said. While the rating firms have a range of lower credit grades that they could assign to the utilities, Alexander said any of them ``represents dire consequences.''

-- (more@on.California), January 04, 2001.

http://biz.yahoo.com/rf/010104/n04116082_2.html

Thursday January 4, 7:10 pm Eastern Time Calif. utilities credit ratings sink despite rate hike By Jonathan Stempel NEW YORK, Jan 4 (Reuters) - The credit ratings of California's two largest utilities fell sharply on Thursday, some deep into junk status, after the California Public Utilities Commission approved a 10 percent electricity rate increase that the utilities said isn't enough to ensure they can avoid bankruptcy. The downgrades by Fitch to low junk grades and by Standard & Poor's to the cusp of junk status should make it much more difficult for the utilities, Pacific Gas and Electric Co. and Southern California Edison, to raise the capital they need to remain solvent. Pacific G&E and SoCal Edison had asked for rate hikes of as much as 30 percent. That, they said, would have allowed them to pass on to consumers enough of the nearly $12 billion in wholesale power costs they have been forced to pay. The crisis has already shut the utilities out of the debt capital markets, and downgrades to junk could cause some of their lending banks to pull back their loans. ``There is no possibility of them coming to the capital markets, absolutely none,'' said Dorothea Matthews, a fixed-income analyst for Deutsche Banc Alex. Brown. ``If all we get is the 10 percent rate increase, then it's hard to see how the utilities don't go below investment-grade and file for bankruptcy,'' she added. Pacific G&E is a unit of San Francisco-based PG&E Corp. (NYSE:PCG - news), and SoCal Edison is a unit of Rosemead, Calif.-based Edison International (NYSE:EIX - news). The CPUC unanimously awarded Pacific G&E and SoCal Edison, which together serve 24 million Californians, temporary rate hikes of 7 percent for small businesses, 9 percent for residential customers, 12 percent for midsize businesses, and 15 percent for big industrial customers. The rate freeze, adopted in a 1996 state law deregulating the California electricity market, remains in place, and analysts said that has to change for the utilities to stay solvent. ``The legislature, the governor and others have to declare the rate freeze over,'' said Shawn Burke, head of U.S. investment-grade research at Barclays Capital. ``That would effectively push the bulk of the commodity risk onto customers.'' PG&E shares fell $5, or 29.4 percent, on the New York Stoxk Exchange to close at $12. Edison International shares fell $1-1/2, or 12.2 percent, on the Big Board to close at $10-3/4. Both bounced off their intraday lows on hope California's legislature will provide relief, analysts said. S&P's utilities index fell 6.4 percent Thursday. SoCal Edison's debt also bounced off its intraday lows. Its 7.625 percent notes maturing in January 2010 were bid late Thursday at 70 cents on the dollar, down from about 80 on Wednesday but up from 64 Thursday morning. RATINGS SLIDE Fitch made the deepest rating cuts, slicing its senior unsecured debt and commercial paper ratings for Edison Internation, SoCal Edison and Pacific G&E to ``CCC'' and ``C,'' respectively. ``Default is a real possibility for these utilities and their parent companies,'' it said. Another agency, Standard & Poor's, cut its senior unsecured and short- term debt ratings for SoCal Edison, PG&E and Pacific G&E to ``BBB- minus'' and ``A-3,'' its lowest investment grades, and cut Edison International's respective ratings to ``BB-plus,'' its highest junk grade, and ``A-3.'' While concluding that further downgrades ``may soon result,'' the agency said California's legislature is trying to address the crisis in a hurry. ``It is precisely the potential dire consequences of inaction that leads Standard & Poor's to conclude that there is a reasonable chance that action is forthcoming,'' it said. Even the S&P downgrades, though, could make the going very difficult for the utilities. The reason: short-term debt markets are often closed to companies with ``A-3'' ratings. The other leading rating agency, Moody's Investors Service, has yet to act on the utilities after the rate hike, but warned that a downgrade to junk status could be in the works. Still, Matthews said, ``if S&P or Moody's goes to junk, that's psychologically the equivalent of both going. The key remains the banks. Will the banks remain patient and continue to lend the money while the California legislature considers what to do?'' Analysts said the legislature should consider allowing the utilities to securitize some of their assets. ``The legislature will have to pass a law saying those (unfunded costs) can be recovered from rate payers,'' said Burke. Ideally, he said, ``that will essentially turn a 'triple-B' obligation of the utilities into a 'triple-A' obligation in the asset- backed market, and allow the utilities to recover the costs in a financially efficient manner,'' he said.

-- (in@energy.news), January 04, 2001.