Wall Street Is Cool to Davis’ Energy Plans
Wall Street was unimpressed by Gov. Gray Davis’ latest energy initiatives, further chipping away Tuesday at the value of California’s two big electricity utilities.
But investors and analysts continued to hold out some hope for a speedy solution from the state Legislature that would provide the utilities with needed cash to buy electricity for customers next month, even as fourth-quarter earnings deadlines loom for Edison International and PG&E; Corp., parents of Southern California Edison and Pacific Gas & Electric.
Utility watchers also were encouraged by an Edison court victory Monday that may pave the way for the Rosemead utility to recover nearly $5 billion in electricity costs that it can’t pass along to customers because of the current rate freeze.
At the very least, the ruling by a Los Angeles federal judge will allow the utilities to continue to carry the costs on their books without having to report them as losses in the fourth quarter, which would wipe out the companies’ net worth and make them technically insolvent.
“We are disappointed” at the lack of details in Davis’ energy proposals delivered Monday in his State of the State address, said Susan D. Abbott, managing director of corporate finance at Moody’s Investors Service, a Wall Street rating agency that last week downgraded the two utilities’ debt to a notch above junk grade. “But we’re not ready to throw in the towel yet.”
Davis proposed spending $1 billion to short-circuit California’s electricity crisis with plans to boost conservation, build more electricity plants by providing low-interest loans and state land, possibly establish a state power authority and investigate the market behavior of electricity generators and resellers.
But Davis gave no hint of a much-anticipated bailout that might involve selling billions of dollars in state-backed bonds to be repaid through a charge on customer bills.
“Davis didn’t answer the rating agencies’ question, which is, ‘Where is the cash going to come from so the utilities can buy electricity for their customers?’ ” said Lori Woodland, an analyst with Fitch Inc., which last week downgraded the utility debt to “highly speculative,” or junk status.
Shares of Edison International slipped 88 cents, or 7.3%, to close at $11.13 on Tuesday, and shares of PG&E; Corp. lost 50 cents, or 3.6%, to close at $13.50. Both trade on the New York Stock Exchange.
The two issues have been gyrating wildly on each day’s news, setting 52-week lows Thursday when the California Public Utilities Commission approved a smaller-than-expected rate increase for SCE and PG&E; of 9% for residential customers and 7% to 15% for business customers.
Earnings for the fourth quarter and the entire year were expected to be reported late next week by Edison International and San Francisco-based PG&E.; But the two utility holding companies, which serve 24 million Californians, said the earnings almost certainly will be delayed as officials in Washington and Sacramento labor to craft a fix for the companies’ cash crunch.
Soaring electricity prices since June have led the two utilities to amass more than $12 billion in wholesale costs for power, but they have been unable to charge residential and small-business customers the full cost because the commodity portion of their bills is frozen at a small fraction of the actual price of electricity.
Both Edison and PG&E; declined to speculate on the effect recent developments would have on earnings, including whether the two companies would continue to carry the electricity costs on their books as an “undercollection,” rather than as a loss. The total, about $5 billion for Edison and about $7 billion for PG&E; at the end of December, would more than wipe out each company’s net worth if each were forced to recognize the costs as a loss.
Such a technical insolvency would be devastating, even though those funds already have been spent, Edison spokeswoman Andrea Simpson said. “It would have a practical effect. It would affect bank credit lines.”
If Edison had accounted for these costs as losses in the third quarter, the company’s stronger-than-expected earnings of $606 million for the nine months would have turned into a net loss of $1.75 billion, said Douglas Ames, a Huntington Beach lawyer representing a shareholder group that is alleging securities fraud.
“I just don’t understand how they can be reporting record earnings at the same time they claim they are going bankrupt,” Ames said.
Analysts said the utilities probably can continue to avoid booking these costs as losses because of Edison’s court victory Monday, in which U.S. District Judge Ronald S.W. Lew ruled that Edison has the right to pass on to customers any “reasonable” costs it incurred in buying power for their use. Now a trial will determine what costs are reasonable. PG&E; faces a hearing on a similar suit Jan. 30.
