Legislative Progress Buoys Utility Stocks
The heavy cloud cover over California’s investor-owned utilities lifted a bit Thursday on the prospect of legislative help from Sacramento and slightly better-than-expected earnings news out of San Diego.
Share prices of Edison International and PG&E; Corp. surged as the state Legislature made headway on potential solutions to California’s energy crisis, which has pushed Southern California Edison and Pacific Gas & Electric to the brink of bankruptcy. The progress in Sacramento prompted Merrill Lynch & Co. to upgrade to “accumulate” from “neutral” the stock of both parent companies and that of their San Diego counterpart, Sempra Energy.
In addition, Sempra, the parent of San Diego Gas & Electric and Southern California Gas, reported a smaller-than-anticipated decline in fourth-quarter earnings and forecast improved profit for 2001, boosting its stock.
Merrill Lynch analyst Steven Fleishman acknowledged that some may wonder “why we are crazy enough to do this”--that is, become the first major investment firm to warm up to the utilities’ still risk-filled futures.
“We do fully recognize the fluid nature of this situation and that the legislative solution could fail,” Fleishman said. “This is not something that you bet your retirement on.”
Still, he said, the risk of bankruptcy has fallen from “50-50ish” to less than 25%.
PG&E; shares soared $3.06 to close at $13, a 31% gain for the day, while Edison shares rocketed $3.31, or 35%, to $12.69. Sempra shares rose 44 cents to $20.44. All trade on the New York Stock Exchange. The rebounding stock prices buoyed many elderly investors who have poured money into utility stocks and bonds, drawn by their relatively generous yields and the long-held belief that the investments were secure.
Arthur Slobod, a 90-year-old Laguna Woods resident who owns 3,000 Edison shares, got the encouraging news Thursday in a call from his broker.
“Naturally, I’m happy about that,” he said. And, even though the stock’s value is still only about half what he paid for it last year, Slobod was feeling more optimistic about the company’s future. He plans to hang on to his shares.
“I’m assuming they will not go bankrupt,” he said. “If they don’t, in the long haul, I will probably recoup most of this. If we can survive this critical period, I think it looks pretty good.”
Sempra Energy said Thursday that its fourth-quarter profit fell 10% from a year earlier as it grappled with the state’s power crisis. But the company emphasized that it remains much stronger financially than California’s two other strapped investor-owned utilities, a view echoed by analysts.
Even so, the SDG&E; unit is asking the state Public Utilities Commission to place a surcharge on customers’ bills over the next five years so the company can recover the shortfall between soaring wholesale market prices for electricity and its customers’ capped rates--the same problem that’s plaguing its northern neighbors even more severely. The surcharge, if approved, would work out to about $11.50 a month on top of the typical residential bill of $72.
“We’re in a much different financial and regulatory position” from those of Edison and PG&E;, Sempra Chairman Stephen Baum said in a teleconference with analysts. And although Sempra is “acutely aware of the financial crisis they confront,” it wants to ensure that their problem “doesn’t migrate to San Diego.”
“We have a workable plan and a pathway to solve this problem,” he said. SDG&E; provides service to 1.2 million customers in San Diego County and southern Orange County, and Southern California Gas has 5.8 million customers throughout Southern and Central California.
In the quarter ended Dec. 31, Sempra’s net income fell to $95 million, or 47 cents per diluted share, from $105 million, or 44 cents a share, a year earlier. The per-share income rose because Sempra had fewer common shares outstanding than a year ago.
The profit just topped analysts’ expectation of 46 cents a share, according to First Call/Thomson Financial. The earnings also came on a 53% jump in Sempra’s revenue, to $2.3 billion, but expenses--including its cost of buying power--soared 62% from a year ago, to $2.1 billion.
“I think [the lower profit] has to do with the challenges associated with the problems in California,” said Donato Eassey, an analyst with Merrill Lynch & Co. “But their problems are not nearly as extensive as the other guys’.”
Sempra’s results included a 9% increase in SDG&E;’s fourth-quarter earnings, to $38 million from $35 million a year earlier. Profit from Southern California Gas, meanwhile, slipped 5% to $56 million from $59 million.
Like many of its peers, Sempra is trying to expand its unregulated divisions that trade energy and other commodities, provide wholesale power generation and operate overseas.
But with the bulk of its business still in providing power in Southern California, the company’s outlook remains tied to the state’s electricity crisis. Ironically, though, Sempra is weathering the crisis more deftly because it took the brunt of the state’s deregulation effort sooner.
SDG&E;’s customers became the first in the state to pay the full cost of energy under the 1996 deregulation law, because the utility sold its generating plants faster than the others. But after consumers howled that their bills were soaring, the Legislature rolled back and again capped electricity rates for all but the largest commercial and government customers.
Yet it also provided a way for SDG&E; to recoup those costs later, which has made Sempra a much stronger company than its California peers in the eyes of Wall Street and the banking community. SDG&E;’s rate cap ends Dec. 31, 2003, and the utility can ask the PUC for a surcharge on customers’ bills in the meantime, so that it can recover the difference between its cost of buying power and customers’ payments--a figure that currently stands at nearly $447 million.
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Times staff writer Leslie Earnest and Bloomberg News contributed to this report.
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GREENSPAN TESTIFIES
Fed chief says the nation needs to examine California’s power crisis. A1
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A Turning Tide?
The outlook for California’s debt-ridden big utilities has brightened on expectation of legislative relief in Sacramento. Merrill Lynch upgraded its recommendation on the stocks of their parent companies, all of which gained on the NYSE. Weekly closes and latest:
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Edison
Thursday: $12.69, up $3.31
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PG&E;
Thursday: $13.00, up $3.06
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Sempra
Thursday: $20.44, up 44 cents
Source: Bloomberg News
