What’s Next for Edison? A Primer

As the framework for a scaled-down plan to make Southern California Edison solvent emerged in Sacramento this week, analysts said the fate of the state’s second-largest utility will be decided by politicians rather than the power generators, bondholders and other creditors that have waited months to collect what’s owed them.

“We suspect the primary stumbling block right now is political and not based on numbers,” credit analyst Daniel Scotto of BNP Paribas in New York told clients in his daily newsletter Wednesday.

Yet the future remains murky for Southern California Edison, which lost billions of dollars in the last year when it purchased electricity for more than it could charge its customers under a state-imposed rate freeze. Gov. Gray Davis has urged legislators to approve a bailout of the utility. But after numerous false starts and political infighting, there’s no assurance that lawmakers can agree on the latest rescue plan, Scotto said.

However, there is wide consensus that the next three to four weeks will be pivotal for the Rosemead-based utility as a number of critical deadlines loom. Here is a recap of the issues facing Southern California Edison as it attempts to avoid bankruptcy.

Question: How much does Southern California Edison owe, and how much cash does it have?

Answer: In a Securities and Exchange Commission filing this month, the utility said it had $3.3 billion in energy debts and defaulted bonds and loans and about $1.7 billion in cash. But Edison officials have been inconsistent in their public statements about the utility’s debts. SEC documents list one figure, but company executives have pegged the debt at $3.5 billion. By some estimates, interest charges could add about $400 million to its obligations. This debt accrued over the last year when the utility was unable to raise customers’ rates as the cost of electricity zoomed higher.

Q: Would the legislative rescue plan help the utility pay its debt?

A: In the latest plan, which has the support of Davis and key members of the state Assembly, the utility would sell at least $2.5 billion in bonds that would be paid off over 10 to 15 years with a portion of the rates business customers pay. SCE could use the proceeds from the offering to repay bond and note holders as well as the group of alternative and small power generators known in the industry as “qualifying facilities.” That would leave about $1 billion owed to the large generators, and an additional $400 million in back-interest payments for the utility and its parent company, Edison International Inc., to settle on their own. The details of the plan are still being worked out, and it could allow Edison to increase the size of the bond offering to include the interest payments. The Assembly also would have to iron out the differences between its plan and a version passed by the state Senate last month.

Q: What does Edison say needs to happen?

A: Edison says that any solution must make the utility “credit-worthy,” a status that would allow it to borrow money and resume purchasing the power the state is now buying to supply about a third of the electricity demand by SCE’s 4 million customers.

David Bodek, a director with Standard & Poor’s, one of the nation’s top corporate credit rating services, explains that to be credit-worthy, the company needs to pay its outstanding obligations and be in a position to pay its future financial obligations with “a fair degree of certainty.” Only then will Wall Street and investors be willing to lend SCE money to finance its business operations.

Ideally, the utility’s financial footing would win it an “investment grade,” or top rating of America’s most secure companies. However, analysts believe it could get by with a lower rating, although that would increase interest expenses and tighten cash flow.

Q: What would make the utility credit-worthy?

A: That’s one of the key issues of the rescue plan. Previously, SCE said it needed as much as $3.5 billion in bonds to pay its debts. Last month, the state Senate passed a plan that offered $2.5 billion, which triggered a protest from the utility. But earlier this week, Edison officials told The Times that the lower number might work, with some modifications including having ratepayers foot the cost of the bonds.

Both SCE and the state said preliminary estimates show that there is enough revenue being generated by current power rates to pay off both the state’s obligations--which amount to at least $8 billion--and the utility’s debts without raising customers’ rates. The problem is that the California Public Utilities Commission governs where that money can go. As of now, it has restricted how SCE can use any rate surpluses to pay off debts.

Some consumer groups would object to a loosening of restrictions, arguing that the utilities are responsible for their debts because they supported power deregulation.

Q: Is this only a matter of who gets the cash?

A: Not completely. Before investors will lend SCE money, they must have assurances from the state that the utility will be able to cover what it pays for power in the future. No one will lend the utility money, and rating agencies won’t upgrade its credit-worthiness, if there is even a remote possibility that SCE won’t be able to raise customers’ rates when the cost of electricity rises, according to analysts.

Q: Won’t the utility be able to obtain rate increases after the current freeze, which was enacted with deregulation in 1996, expires in March?

A: In theory, yes. That’s what Pacific Gas & Electric and several consumer advocacy groups believe. But the California energy crisis has often proved prognosticators wrong, Scotto said.

“Nothing seems definitive even when it is labeled definitive,” he said.

For example, in June, when regulators raised rates by 3 cents a kilowatt-hour, Wall Street believed the increase would help repair SCE’s finances. But it didn’t count on PUC placing limitations on how the money could be used. These issues, among others, are scheduled to be decided during PUC hearings early next month.

Q: What are the next important dates?

A: The Legislature adjourns Sept. 14. It’s not clear what might happen if no SCE rescue plan is crafted by then. However, the utility’s creditors might become impatient with what assuredly would be more delays in getting paid and could force the utility into bankruptcy. Additionally, the payment of certain SCE bank loans has been delayed, but come due again in mid-September, and it might have difficulty obtaining more extensions.