Edison, PG&E's Outlook Dims as Shares Plunge, Debt Ratings Drop

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Friday, January 5, 2001 Edison, PG&E's Outlook Dims as Shares Plunge, Debt Ratings Drop

By NANCY RIVERA BROOKS, JAMES F. PELTZ, Times Staff Writers

Wall Street delivered a stunning, though not fatal, double blow to California's beleaguered big utilities Thursday, as investors sent shares of Edison International and PG&E Corp. plunging and two key credit agencies slashed the firms' debt ratings.

The developments further dimmed the financial outlook for the utilities and pushed their once-stalwart debt--long considered a haven for the most conservative investors--into or very near the high-risk world of junk bonds. The utilities' creditors followed investors over the edge Thursday, as they scrambled to minimize their own financial hits and accelerated demands for immediate payment for everything from electricity to office supplies.

"We are being inundated with requests" for upfront cash payments, said James Scilacci, chief financial officer of Southern California Edison. "People are very concerned. . . . When that happens, you burn through cash very quickly." In response to the California Public Utilities Commission decision to raise electricity rates for the two utilities' customers by 7% to 15%, Standard & Poor's lowered the debt ratings of both SCE and PG&E to a notch above speculative grade, more popularly known as junk bonds.

Another rating agency, Fitch Inc., took more drastic action, downgrading the utilities' several forms of debt to "a deeply speculative grade," which is a rating of "BB+" or lower. If all three agencies--including Moody's Investors Service, which took no action Thursday--were to deem the utility debts as junk, it would place the companies in violation of certain conditions on their loans, triggering accelerated payments. "What we're saying is as it stands right now, things do not look good," said Lori Woodland, a utility analyst with Fitch. "The rate increase is just not enough to stem the drain of cash." S&P said Southern California Edison "is facing imminent default unless California regulators and politicians can immediately craft a viable financial solution that restores liquidity to the utility." The revenue shortfalls at the utilities are "staggering," S&P said.

'An Important First Step' Unlike consumer advocacy groups, which have expressed doubts about the utilities' poor financial health, and other outside analysts, the credit-rating firms have unique insider access to up-to-date corporate financial information, Woodland said. The debt ratings reflect the agencies' assessment of how likely the companies are to make timely payments of money they owe, and are closely watched by lenders and other creditors. Nonetheless, S&P as well as PG&E found enough hope in the state's amended rate hike order and in the efforts of the current special session of the state Legislature to believe that bankers will keep cooperating with the utilities to stave off bankruptcy. PG&E Corp. Chief Executive Robert D. Glynn Jr. called the PUC order an "important first step" that "should provide adequate assurance to our lenders and suppliers that a solution to the problem is in the making and that they should continue to work with us while this solution is being finalized."

Indeed, reports surfaced Thursday that Gov. Gray Davis and the Legislature were working on some sort of state-backed bond issue to pay for electricity, with the cost ultimately borne by ratepayers. Before reports of such a deal surfaced, the stocks of Edison and PG&E had plunged yet again as investors found the PUC's rate increase not nearly big enough to salvage the utilities. At one point, nearly half of Edison's remaining stock market value had vanished in just a few hours of trading, as the stock plummeted to $6.25 a share from $12.25 a share Wednesday. At that low spot, Edison's entire market value was a meager $2 billion, down from $6.5 billion in July, and $6.7 billion of PG&E's total market value had vanished during that span. The stocks cut their losses somewhat after reports of the bailout effort reached investors, but the shares still suffered serious damage. Edison ended the day down $1.50 a share, to $10.75, and PG&E's stock tumbled $5 a share, to $12--a 29% plunge. Both trade on the New York Stock Exchange.

Assuming the utilities don't get a last-minute reprieve by the governor, the Legislature or the courts, Edison and PG&E are now almost certain to seek protection under the bankruptcy laws because the PUC decision isn't enough to cover their costs, some analysts said. "There is no doubt in our minds that the [PUC] order was insufficient to prevent the companies from running out of cash," said Paul Fremont, an analyst with the brokerage firm Jefferies & Co. Steven Fleishman, an analyst at Merrill Lynch & Co. in New York, agreed that the PUC's order "is wholly inadequate for the utilities." Barring action by government officials, "the utilities' credit ratings would likely go below investment grade, which would precipitate defaults on certain debt" of Edison and PG&E "and accelerate a move to bankruptcy," Fleishman told clients in a bulletin Thursday. Douglas Christopher, an analyst with Crowell, Weedon & Co. in Los Angeles, said "there is no question" the companies will seek bankruptcy protection if there isn't more relief for the utilities. But, he added: "I am very confident something will happen" to avoid that fate. "It makes common sense that these companies should not go bankrupt," he said. Meanwhile, the stocks of many electric power generators--which had soared last year as deregulation, rising prices and their own expansion efforts caught Wall Street's eye--also tumbled again Thursday in response to the problems at Edison and PG&E. For instance, shares of Calpine Corp.--a San Jose-based power provider whose stock price had nearly quintupled between mid-1999 and last summer--dropped $6, to $32.50, and they have now lost 30% of their value in just the last five trading days. Investors fear that the suppliers won't be able to collect payments they are already owed from Edison and PG&E if the utilities enter bankruptcy--at least not any time soon--and that the utilities' future orders for power might somehow be curtailed as the companies wend their way through bankruptcy proceedings.

Some Doubt Pressure to File Bankruptcy But much as a bank is usually reluctant to foreclose on a homeowner who has defaulted, the utilities' major lenders probably aren't pressuring Edison and PG&E to file for bankruptcy, some analysts said. (The typical bankruptcy filing, Chapter 11, enables a company to keep operating while freezing its existing debts. It also protects the firm from creditors' lawsuits or efforts to seize the company's assets until the court maps out a way for the company to pay its bills.) Indeed, one of PG&E's major bank lenders said Thursday that the situation is still so fluid that the bank hadn't yet made any firm decision about its next step, according to a spokesperson who agreed to speak on the condition the bank not be identified. "I don't think the creditors are going to lean on them" to seek bankruptcy, said Jefferies' Fremont. "But if I were a bank or other lender . . . I would not lend another dime to these companies unless I am provided with some reasonable assurance that the money can be repaid." The utilities have said in effect that, after borrowing more than $11 billion between them in recent months to buy power at its soaring wholesale prices, they're tapped out. They can't get more cash from lenders unless those creditors believe that the gap between what the utilities are paying for power, and what customers are paying the utilities for that power, narrows dramatically. Even before the utilities' situation deteriorated so badly in the last two months, they were standing on shaky financial ground. Edison, for instance, had $1 billion in cash on hand as of Sept. 30, and it was owed by customers--a sum known as accounts receivable--$1.8 billion. The stated value of its utility plants, meanwhile, was $7.7 billion.

But all of that wasn't much more than the $9.6 billion of short-term debt that Edison faced--meaning bills it has to pay within the coming year. And that figure was before Edison and PG&E had to scramble to buy even more higher-cost power--with mostly borrowed cash--to get through November and December. Copyright 2000 Los Angeles Times

http://www.latimes.com/cgi-bin/print.cgi

-- Martin Thompson (mthom1927@aol.com), January 05, 2001


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