S&P threatens SOCAL and PG&E with junk bond ratings

Standard & Poor�s threatened to lower the credit ratings of Pacific Gas and Electric Co. and Southern California Edison Co. to junk bond status if California state or federal officials do not take �drastic� action that will improve the liquidity of those companies immediately. �If no action is taken, the ratings will fall deeply into speculative grade to reflect imminent default,� said Richard Cortright, S&P�s director of utilities at S&P, on a conference call.


Ann de Rouffignac
OGJ Online

Standard & Poor�s threatened to lower the credit ratings of Pacific Gas and Electric Co. and Southern California Edison Co. to junk bond status if California state or federal officials do not take �drastic� action that will improve the liquidity of those companies immediately.

�If no action is taken, the ratings will fall deeply into speculative grade to reflect imminent default,� said Richard Cortright, director of utilities at S&P, on a conference call.

The California Public Utility Commission (PUC) is scheduled to meet Thursday and discuss the two California utilities� financial condition. Earlier, the PUC denied a request for rate relief.

�Tomorrow�s CPUC meeting looms large,� Cortright said.

These two investor-owned utilities have been accumulating substantial debt to pay for wholesale power that has skyrocketed in price because of flawed wholesale market conditions, scarcity of generation, and rising demand for power. The unrecovered balances have mounted to $4.5 billion for Pacific Gas and Electric, a unit of PG&E Corp., and $2.6 billion for Southern California Edison Co., a unit of Edision International, according to S&P. Because the utilities are under a rate freeze, they can't pass on the full cost of wholesale power to retail customers.

�If we don�t get rate relief, we can�t meet our January financial obligations,� Kevin Kelley, spokesman for Edison International, said in an interview.

To meet working capital demands, the two utilities have been going to the capital markets and taking on additional debt.

But the point has been reached that the capital markets are not likely to extend more credit to meet working capital needs, unless creditors are given clear assurance that cash flow will improve, Cortright said.

�The credit capacity of these companies was designed to reach deep into 2001. But it will be tapped out in a matter of weeks,� says Cortright. �The companies may run out of cash within weeks.�

While S&P suggested that the utilities are about to run out of cash and be turned down by the capital markets in January, Edison International�s Kelley could not verify the company has violated any covenants on debt instruments or missed any payments to date.

Nevertheless on the basis of information given the ratings agency by the companies, S&P expects drastic action within 24 to 48 hours, he says.

S&P officials said these huge unrecovered balances will have to be amortized and recovered from customers within a reasonable period of time. Cortright said a 10% rate increase�a number California Gov. Gray Davis is said to support�will not be sufficient to ward off a ratings downgrade.

�We expect a substantial increase in rates if only because of the sheer size of the unrecovered balance,� says Cortright.

When pressed, Cortright conceded a 20% rate increase over 5 years might help ward off a severe downgrade, but he stopped short of recommending any specific action.

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