Fitch lowers outlook of three California utilities

Chicago-based rating service Fitch IBCA said it lowered its outlook for San Diego Gas and Electric Co. (SDG&E), Southern California Edison Co. (SCE), and Pacific Gas and Electric Co. (PG&E) to negative from stable on liquidity pressures stemming from high wholesale electric power costs and uncertain recovery of these expenses under existing regulatory structures.

To the extent liquidity pressures are sustained, a cash flow shortage could impact utility dividends to their parent companies, Fitch warned. SCE and PG&E are continuing to recover stranded costs through a portion of retail rates frozen through Mar. 31, 2002 at the latest.

Moody�s Investors Service Inc. downgraded the long-term debt ratings outlook to negative from positive for San Diego Gas & Electric Co. and its parent, Sempra Energy earlier this month. (Oil & Gas Journal Online, Sept. 7, 2000)

As a quick resolution of this issue is unlikely, the utilities' liquidity could be further pressured, Fitch said. It notes that SDG&E's very low leverage provides the utility the greatest financial flexibility to withstand reduced cash flow. Both SCE and PG&E have formidable financial resources to withstand a stressful season, but a prolonged period of unrecovered costs would have a greater impact on SCE and PG&E.

Presently, the cost of procuring power is well above headroom available under frozen rates. These excess operating costs are creating a drain on net cash flow, Fitch said. SDG&E faces excess operating costs to procure power, but completed the recovery of generation-related stranded costs in July 1999.

Since selling a large part of their generation as part of the state's initial industry restructuring, the three utilities are now net purchasers of power. Absent a change in the current regulatory and legislative framework or a profound drop in market prices, funding the high-priced purchases will likely require increased debt, weakening financial coverage ratios, Fitch said.

While political and regulatory uncertainty affects all three utilities, the companies' circumstances are not identical, Fitch observed. PG&E and SCE remain subject to the initial rate freezes under California's restructuring settlements until Mar. 31, 2002. PG&E and SCE are also permitted to reduce their stranded costs to the extent gains are generated on asset sales or their revaluation.

SDG&E began billing customers directly for all purchased power costs this summer. Customer complaints prompted the California legislature to impose a new freeze on the energy-only portion of SDG&E's residential and small commercial tariffs retroactive to June 1, 2000. Resolution of recovery relies on a future decision by California Public Utilities Commission. To the extent full recovery is withheld, Fitch said, SDG&E may challenge the ruling in federal court.