Moorlach’s Office Alerted on Edison Before It Invested

Three weeks before Orange County Treasurer John M.W. Moorlach bought the first of $40 million worth of investments in Edison International, the county’s credit rating agency issued a warning about burgeoning risks in the California utility market.

The four-page special report, written by Fitch Inc. analyst Lori R. Woodland in Chicago, was distributed Tuesday by Supervisor Todd Spitzer, who had asked Moorlach to appear before the Board of Supervisors to explain the Edison investments.

Spitzer said the report clearly raised red flags about utility investments that should have been heeded by Moorlach’s office. The Edison notes went into the county’s educational investment fund, a $1.3-billion pool that holds excess operational funds for the county’s schools.

Moorlach said Tuesday he was not aware of Fitch’s Sept. 7 report. Titled “Procuring Power in California: A Potential Stranded Cost,” it warned that high prices for electricity might erode the financial flexibility and credit worthiness of the state’s utilities. Fitch has rated the county’s investment pools since 1995.

On Sept. 28, Orange County made the first of two investments with Edison International, the parent company of Southern California Edison, which last week defaulted on nearly $600 million in payments.

Fitch downgraded Southern California Edison notes on Dec. 11--four days after the second county purchase. The utility company’s investments later were downgraded by two other rating services--Moody’s on Jan. 4 and Standard & Poor’s on Jan. 5--to essentially junk-bond status.

The Orange County purchases were made by the two investment officers who Moorlach said make his office’s daily trades.

So far, the county pool has not lost any money. On Friday, Edison International announced that it intends to pay all of its obligations. A $20-million Edison commercial note matures Jan. 31. Another $20-million medium-term note matures July 18; the company made its interest payment last week as scheduled.

Moorlach said Fitch may have issued its warnings on Sept. 7 but that did not cause the agency to downgrade its rating of Edison’s investments, which carried their highest rating for both of the county’s purchases. He said his office’s investment research centers on the credit ratings issued by Fitch, Standard & Poor’s and Moody’s.

“All of our data showed things were still rather comfortable” when the trades were made, Moorlach said. “What we encountered in the finance world was the 100-year flood.”

Fitch analyst Steve Lee in New York said the company does not automatically downgrade its ratings if there are potential troubles ahead. However, special reports like that issued on Sept. 7 are distributed to make investors “aware that there are more downside risks out there than the rating would indicate,” he said.

“Ratings are to be used as one source of investment advice,” Lee said. “We cannot go [into] every portfolio and see that things are in compliance all the time. That’s the job of the investment manager, in this case the treasurer’s office.”

Spitzer questioned Moorlach, who became treasurer after the county’s 1994 bankruptcy, about who was responsible for making the trades and whether Moorlach himself was directly involved. Moorlach said last week he did not learn of the second Edison investment until a week after it was made.

The Board of Supervisors annually delegates its authority over the investment of county funds to the treasurer. On Dec. 19, the board voted to do so again.

“As a result of the hearing, the treasurer acknowledged that he did not oversee the purchases,” Spitzer said after Tuesday’s meeting. “The board didn’t know that.”

Spitzer said the information made him “uncomfortable.”

“I don’t think many board members walked out of the meeting today and said, ‘I’m comfortable,’ ” Spitzer said.

Spitzer and Supervisors Tom Wilson and Chuck Smith said they want Moorlach to hold a workshop with board members to discuss investment practices and procedures, as well as oversight responsibilities. Moorlach has a technical advisory panel that reviews trades weekly; the Treasurer’s Oversight Committee ensures that the office’s activities are within state law and the county’s investment policy.

Moorlach said the office is considering commingling the educational investment pool with the county’s regular investments, as well as adding an investment analyst to the treasurer’s office.