Advertisement

Edison, PG&E; Stocks Skid on Solvency Concerns

Share
TIMES STAFF WRITERS

Fears that California’s two largest utilities are sliding toward insolvency and that one may suspend its dividend sent Edison International and PG&E; Corp. shares plummeting to 52-week lows Thursday, another sign of investor nervousness over California’s deepening energy woes.

The sell-off occurred in heavy trading on the New York Stock Exchange, with Edison sliding $2.94 to close at $14.94 and PG&E; losing $2.69 to $18.25. The market closed before the California Public Utilities Commission announced some positive news for utility investors--if not ratepayers--by laying the groundwork for retail rate hikes early next month. It’s a step that Wall Street observers said was necessary to restore confidence in the battered issues.

Both utilities have sunk deeper and deeper in debt during California’s continuing energy crisis because the skyrocketing cost of wholesale electricity in the last six months has risen far above what they can collect from consumers because of a rate freeze. That growing mountain of debt is now estimated to surpass $8 billion.

Advertisement

Analysts attributed Thursday’s sell-off in large part to a warning a day earlier by the Standard & Poor’s credit-rating agency that it might downgrade both Edison and PG&E; debt totaling $15 billion from “A+” to junk-bond status unless the state utilities commission took action to empower the companies to collect those debts from ratepayers.

It was unclear late Thursday whether the action was enough to satisfy S&P;, whose analysts were unavailable for comment. Some observers viewed the ruling as welcome news in that by allowing Edison and PG&E; to raise revenues, it would assure the accessibility of loans to cover power purchases in the short term--even if it left the utilities’ long-term futures clouded.

“It’s a positive sign because it provides the signal that utilities will likely be able to buy power from the market,” said Mike Zenker of Cambridge Energy Research Associates in Oakland. “But investors still have reason to be concerned. It remains unclear who will shoulder the burden of uncollected costs.”

Steve Fleishman, a Merrill Lynch utility analyst in New York, expressed a mixed reaction to the commission’s decision.

“They made a strong statement they will do what they need to do so that utilities can avoid bankruptcy. But as of today they don’t do it, which is come up with a concrete rate increase,” he said.

But consumer groups immediately decried the PUC action as a bailout for utilities. “This is regulation by Wall Street,” said Nettie Hoge of the Utility Reform Network in San Francisco.

Advertisement

Edison confirmed Thursday that its board of directors still has not authorized its regular dividend of 28 cents per common share--which many of Edison’s 85,000 common shareholders count on for income. A spokesman said Thursday that based on past practice, the board would usually have acted by now to declare the dividend payable during the first quarter of next year.

“It would seem logical that if the utilities are in a liquidity crunch and on the verge of insolvency, they should be looking at their dividend policy, among other things,” said David Bodek of Standard & Poor’s.

In October, PG&E; declared a 30-cent-per-share dividend payable Jan. 15, the utility’s 340th consecutive quarterly dividend. Asked whether dividends would be forthcoming if PG&E;’s problems persist, a spokesman said, “I haven’t heard anything otherwise.”

Bodek had warned Wednesday that his agency was prepared to make the rating downgrades because it had a duty to inform investors that Edison and PG&E; were headed toward insolvency and possible bankruptcy unless the state acted to give them the means with which to collect at least a portion of the under-collections.

“Rather than finding fault--who enacted the legislation, what the commission did or did not do--the important focus needs to be what can be done and who can do it,” Bodek said, referring to the landmark 1996 law that deregulated the state’s electricity industry.

S&P; has not issued a rating warning on California’s other investor-owned utility, Sempra Energy, parent of San Diego Gas & Electric Co. and Southern California Gas Co. Bodek noted that the San Diego company for the moment faces no immediate danger of insolvency because it has adequate cash supplies to continue buying energy and because its debt is manageable.

Advertisement

But the day of reckoning is approaching for Edison and PG&E;, which remain on the verge of financial collapse, Bodek said. Edison executives this week acknowledged that they were having difficulty borrowing money to buy wholesale energy and that bankruptcy was a distinct possibility.

The specter of bankruptcy has forced observers to deal with its implications. If the utilities were to go into default, they could try to negotiate out-of-court deals with creditors, suppliers, bondholders, stockholders and government officials.

But experts say the most likely next step is for the companies to file for Chapter 11 bankruptcy, which would give them time to reorganize their businesses while under court protection from creditors.

For customers, the electricity undoubtedly would keep flowing, as it has in past Chapter 11 bankruptcy cases involving power companies.

“It’s important that people not panic and overreact to this. If you look at the experience in other parts of the country where utility bankruptcies have happened, it’s not the end of the world,” said Kenneth N. Klee, a UCLA law professor who specializes in bankruptcy issues.

Still, Klee said, there could be economic costs in the billions: “The question is who will bear the loss.”

Advertisement

Klee, who provided legal help to the Public Service of New Hampshire utility after it filed for bankruptcy court protection in 1988, predicted that Chapter 11 cases involving PG&E; and Southern California Edison would last about three years. (El Paso Electric is the only other major U.S. utility to have sought protection from bankruptcy courts in recent years.)

“This won’t be a quick process, but at least there is a process to accomplish this,” Klee said. “No one likes bankruptcy, but thank God it’s there.”

*

RATE CAP IN DANGER

The PUC clears the way for higher electricity bills affecting 24 million Californians. A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Jolted by Wall St.

Shares of Edison International and PG&E; Corp. fell to 52-week lows Thursday on the threat of a credit downgrade by Standard & Poor’s.

PG&E; on Thursday: $18.25, down $2.69

Edison on Thursday: $14.94, down $2.94

Weekly closes and latest for PCG and EIX

*

Source: Bloomberg News

Advertisement