http://news.excite.com/news/r/010424/21/economy-california-downgrade

S&P cuts Calif. credit rating due to energy crisis

Updated 9:13 PM ET April 24, 2001

By Michael Kahn

SAN FRANCISCO (Reuters) - A major Wall Street rating agency cut California's credit rating Tuesday, increasing the cost of paying off $27 billion in debt due to an energy crisis that threatens to roil the state's economy and drain its coffers.

The downgrade by Standard & Poor's took the rating on California's general obligation bonds down by two notches to 'A-plus' from 'AA, recognizing the debt as a riskier asset for investors and effectively ratcheting up the costs of its financing by what could be hundreds of millions of dollars.

Moody's Investors Service and Fitch have put California on watch for a possible ratings downgrade, but S&P was the first to act and said Tuesday that it would keep the state on watch for possible further downgrades.

In taking the action -- its first downgrade of California since 1994 -- S&P cited the risk that the power crisis could strain the state's finances as it has tested the solvency of major utilities and the power grid itself.

"It is the mounting and uncertain costs of the state's power crisis," S&P Managing Director Steven Zimmermann said. "While they are taking steps, this is going to take a long time to solve and it's not clear the state's general fund will not be needed in the future."

California's energy crisis was brought on by a bungled 1996 deregulation plan that allowed wholesale electricity prices to soar but capped retail rates.

The result has been rolling blackouts, rising rates, a spotty power supply and the bankruptcy of the state's biggest utility. The grim energy situation has also sent lawmakers and state officials scrambling to keep power flowing to the nation's most populous state.

A spokesman for Gov. Gray Davis said the administration was confident the state's plan to issue more than $10 billion in debt securitized by power payments would cover the billions of dollars the state has spent on emergency power purchases in recent months, protecting the California's credit standing.

State Treasurer Phil Angelides, whose office is charged with bringing what would be the largest-ever municipal bond deal to market, urged state lawmakers to move quickly to establish the legal authority needed to issue the bonds.

"California's credit rating and financial strength will be in jeopardy until the state's general fund is repaid for energy costs," Angelides said in a statement Tuesday..

California was the largest issuer of municipal bonds in 2000, selling $3.956 billion in debt in 11 deals, according to Thomson Financial Securities Data.

S&P's Zimmermann cautioned that even the proceeds from the huge bond sale may not be enough to shield the state's general fund surplus, which at the end of February stood at $6.1 billion, down from an estimated $10 billion late last year.

"After selling that debt we still feel there is a possibility the general fund might have to step in again," he said.

State officials have struggled to avoid a credit downgrade during the energy crunch. But analysts said a cut was inevitable given the massive spending on power and the fact that the California's biggest utility is disputing in court how much in electricity revenues the state should get from consumers' bills.

John Hallacy, head of municipal analysis at Merrill Lynch & Co. in New York, said he was not surprised S&P acted first because the rating agency had warned that pressure on the general fund would trigger a downgrade.

"They have always been focused on finances," Hallacy said.

The downgrade was a blow to California's efforts to regain its gilt-edged 'AAA' rating. The state has fought to regain that top rating since S&P cut the state's bonds to 'AA' in 1991 when California was socked with budget deficits and a deep recession.

Both Moody's and S&P had last upgraded California's debt in September 2000. The state's debt is now back to the same rating level as it was in 1996.

Analysts are uncertain how much the downgrades will cost the state in additional borrowing costs, but the state has said it saved $117 million in interest after getting two upgrades in 1999 and 2000.

-- (in@energy.news), April 25, 2001