For Unit of Edison, a Rough Road Ahead

By JERRY HIRSCH

July 2, 2001 12 AM PT

TIMES STAFF WRITER

For the first time in months, Edison International can see a path through the financial and political labyrinth that previously looked to dead-end in bankruptcy proceedings.

Yet the survival of the Rosemead-based power company is by no means assured, as its moves to dodge a date with a federal bankruptcy judge have taken a tremendous toll.

In particular, a desperate effort to save itself last week may have dealt a debilitating blow to Edison’s best remaining business, a subsidiary that builds and operates power plants around the world.

That company, Edison Mission Energy, was once considered the crown jewel of independent power producers.

But today, the Irvine-based subsidiary is burdened with more than a billion dollars of debt, used to help its parent company repay loans and avoid insolvency last week; key managers have fled; and industry analysts and former company executives say it has little hope for growth and will be at a financial disadvantage to its competitors for years to come.

In the end, Edison’s strategy to save itself and its Southern California Edison utility may prove to be a successful but Pyrrhic victory, producing enough cash flow to stave off bankruptcy but not nearly the capital needed for a healthy future.

“The path we are on is difficult and fraught with peril,” John Bryson, Edison International’s chief executive, said in an interview Friday. “But it is clear to us that trying to work this out is vastly preferable to trying to do it with lawyers and judges and creditors committees in a bankruptcy court.”

The latter course is the one chosen by PG&E; Corp., the San Francisco holding company that voluntarily plunged its Pacific Gas & Electric utility into Chapter 11 proceedings in April. PG&E; was willing to trade the chance that a federal bankruptcy judge would strip the utility of important assets to pay creditors but otherwise leave untouched its other main business, independent power producer National Energy Group.

Both utilities became mired in debt, losing billions of dollars buying electricity when wholesale prices spiked during the last year.

While Edison executives cope with a legislative stalemate in Sacramento--where attempts to craft a rescue plan for SCE have stalled--they can take heart in several recent developments.

Major new power plants are coming online, including a Kern County joint venture of Mission Energy and a division of Texaco Inc. Wholesale energy prices have declined, at least for now. SCE has reached repayment agreements with a group of small generators, the most skittish of its creditors.

“A number of elements have come together,” Bryson said.

Having survived a near-death experience last week, when Wall Street nearly balked at Edison’s efforts to refinance $1.2 billion in loans and bonds that started to come due Saturday, Bryson sees an Aug. 15 deadline for a rescue plan worked out with Gov. Gray Davis as the next critical milestone for the company.

The question now, said Theodore Craver Jr., Edison’s chief financial officer and point man on Wall Street, is how long creditors will wait if they don’t see a plan coalescing at the state level.

“This is just not a matter of keeping lightbulbs on,” Craver said. “There are still billions of dollars of unpaid debt and bills that need to be taken care of. And the people who are owed that money are anything but relaxed.”

The utility rescue plan worked out between Edison and Davis still lies stagnant in the California Legislature--its key provision being the state’s purchase of the company’s electricity transmission grid for nearly $2.8 billion--and alternative proposals have thus far failed to gather momentum.

Although the state Senate recently began hearings on the deal at the governor’s request, no votes have been cast, and there is widespread acknowledgment among lawmakers that the proposal, as written, is functionally dead.

Moreover, with the $100-billion state budget and other major matters demanding the attention of Democrats and Republicans alike, there is little effort being made in the Capitol to craft a solution before the mid-August deadline the utility had given state leaders.

In fact, with lawmakers set to take their annual summer break next month after the end of partisan budget theatrics, it is almost certain that no SCE rescue would be approved before fall, if at all.

Senate President Pro Tem John Burton (D-San Francisco) bluntly stated at a recent news conference that he feels no pressure to approve a deal with so many consequences for the people of California in so little time.

Assembly Speaker Bob Hertzberg (D-Sherman Oaks), meanwhile, continues to lead efforts to craft an alternative plan that would place much of the burden of financing an SCE rescue on big business. In exchange, companies would be allowed to bypass the traditional utilities and contract directly with energy marketers for power.

Although the plan has gathered the most support yet among lawmakers, it also has met with opposition from business leaders, who contend that they alone should not shoulder the costs of the energy crisis.

Bryson is concerned but not panicked over the inaction at the legislative level.

“It is a long process trying to understand what has to be done and who needs to do it,” he said.

Yet he concedes that persuading creditors to remain patient is a difficult and at times “testy experience”--not to mention something that worries analysts.

“You still have the risk that if any creditors get spooked, it is very easy for just a few of them to get together and file an involuntary-bankruptcy petition,” said Jon Cartwright, a bond analyst at Raymond James & Associates in St. Petersburg, Fla.

Whether or not Edison winds up in U.S. Bankruptcy Court, analysts say the company’s extraordinary efforts to prevent a bankruptcy filing will have a long-term effect on Mission Energy.

Independent power producers depend on strong cash flow and borrowing power to grow. That’s because power plants generally have a limited output. They don’t work like a retail chain, which will see profit soar when sales per store increase. Independent power producers grow by building new plants and adding generating capacity.

“There’s no question that if credit costs at Edison Mission Energy are extremely high, we will be encumbered in our efforts to grow the company,” Bryson said. Last week’s bond sale to refinance Edison International’s debt was secured by Mission Energy and had a yield of 14%, about double what a healthy company would pay.

Analysts are more pessimistic.

“It’s going to be difficult to even get a project,” analyst Cartwright said. “You need a customer before you can do anything, and who is going to sign up with Mission Energy right now?”

Specifically, he said, Mission’s ability to generate the cash flow required to start construction of new projects has been placed in doubt.

The company has grown rapidly in recent years, nearly quadrupling generation capacity since 1998. As of July 2000, Mission Energy trailed only AES Corp. of Arlington, Va., internationally, according to Platts, an information company that tracks the independent power industry.

Mission Energy’s revenue soared 260% to $3.2 billion from 1998 to 2000. But profit growth has not kept pace. Net income of $125.3 million in 2000 was nearly $7 million less than what the company earned in 1998 on a fraction of the revenue.

Just as worrisome to the company’s ability to grow is the recent flight of executives.

As the energy crisis in California grew, nearly a dozen key executives bolted, including Chief Financial Officer James Iaco, Corporate Secretary Martha Spikes and Thomas Legro, a vice president.

These latest defections add to what has become a nearly complete turnover in Mission Energy’s management since early 2000, including the departures of Chief Executive Ed Muller, Senior Vice President S. Linn Williams and Michael Childers, a vice president of business development who was one of the company’s chief architects for growth.

Bryson said it should surprise no one that people are leaving.

“The skill base remains very good,” he said, “but people want to be sure they have a future to exercise their skills at building a company.”

Bryson believes that such opportunities remain at Mission Energy. He noted that the company is working on four or five projects. And there is room, he said, to boost cash flow and profit through smart management and improving operating efficiencies at the company’s formidable stable of existing power plants.

Times staff writer Miguel Bustillo in Sacramento contributed to this report.

For Unit of Edison, a Rough Road Ahead

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