In the News: Recent Developments

April 11 2001, 2:00am EDT

Calif. Rating Threatened as DavisPians SCE Power Line Purchase

Analysts and public officials warned yesterday that California’s deepening power crisis threatens the state’s credit rating despite Gov. Gray Davis’ tentative agreement to purchase Southern California Edison Corp.’s power transmission lines for $2.76 billion, which would help the troubled utility pay down billions of dollars in debt.

State Controller Kathleen Connell said she fears that the energy crisis will hurt the state’s ability to borrow money in the future.

Connell, who is running for mayor of Los Angeles, said that the state’s ability to issue bonds could be hurt by Friday’s bankruptcy filing by Pacific Gas & Electric Co., and also the state’s spending of close to $2 billion a month to purchase wholesale electricity for the utilities.

“I am concerned about the eroding status of the state’s credit rating,H she said. “There certainly are a lot of unanswered questions here.”

She noted that the SCE agreement would only give the state 38% of the state’s power grid. “How are we going to handle the grid if we don’t have control of 62% of it?” she asked.

Joseph Fichera, chief executive officer at Saber Partners and a financial adviser to Davis on energy matters, countered that the state government could never own 100% of the power grid because approximately 40% was owned by local municipalities and the federal government. At best, California could own approximately 60% of the power grid.

Fichera said that a state purchase of the power grid could cost up to $7.6 billion if California reaches similar agreements to buy transmission lines with PG&E and the San Diego Gas & Electric Co. The total transaction would be financed by the issuance of taxable bonds through an as-yet-unformed power authority. He added that approximately $1 billion in possible upgrades on the grid could be financed through tax-exempt bonds.

Connell said that the current cost of buying electricity was depleting the state’s general fund. “I’m very concerned about what it means to the cash flow,” she said.

Fichera said, however, that the proposed issuance of up to $14 billion in municipal bonds to buy power for California and repay the state for its recent purchases of power was not likely to be affected by PG&E’s bankruptcy filing.

The state last week obtained a $4.125 billion bridge loan for power costs from J.P. Morgan Chase & Co., Lehman Brothers, and Bear, Stearns & Co. The same firms are working on the larger power bond sale.

Fichera said that the proposed bonds would be issued through the state’s Department of Water Resources and that they would not be imperiled by PG&E’s problems because they would be secured by a charge on ratepayers’ electricity bills. He said the proposed bonds would be “secured by ratepayers, not taxpayers.”

He pointed out that since January the state has been loaning money at 6% interest to DWR to buy power.

“We believe that the DWR bonds are separate and distinct from all of this,” said Fichera. “The utilities would simply be acting as the servicers, collecting the charges from the power purchasers for DWR.”

The state treasurer hopes to bring the power bonds to market sometime this summer, but others said PG&E’s bankruptcy could delay the bond sale and that such a delay could force the state to continue drawing on its budget surplus to buy power.

David Hitchcock, director in the state and local government group at Standard & Poor’s, said that bond issuance might experience “some sort of delay.” He added that “bondholders need a clear stream of revenue. That could be influenced by later bankruptcy judges’ decisions.”

Standard & Poor’s put the state’s AA rating on credit watch with negative implications on Jan. 19.

Moody’s Investors Service on Friday changed its outlook on California’s Aa2 general obligation rating to negative from stable saying the bankruptcy filing by the state’s largest investor-owned utility would burden the state with an even greater need to buy power on the expensive wholesale market. The state’s power purchases have not yet seriously affected its strong liquidity position, but buying more power increases the risk of a more sustained general fund involvement, analysts said.

“In this context, the governor’s recommended $1.9 billion budget reserve for fiscal 2002 is potentially an inadequate financial cushion,” Moody’s analysts said in a report released Friday.

Even if the state sold the maximum amount of revenue bonds allowed by the California Public Utilities Commission last week, it would be inadequate to fund the state’s power purchases through 2002. A large portion is dedicated to repaying the general fund, which has expended about $3.8 billion to date, leaving less to buy power going forward.

More rate increases may be necessary, analysts said, or the state may have to tap the general fund for power purchases later.

The state also faces uncertainty about the reliability and cost of power and the potential for a disruptive ballot initiative.

“Our Aa2 rating on the state reflects that we remain positive about the strength of the state’s financial and economic health,” Moody’s managing director Renee Boicourt told investors in a teleconference Monday. “However, the lack of progress now evidenced by the bankruptcy has the potential to plunge the state’s credit into a downward spiral if consensus is not ormulated to resolve the crisis.”

Meanwhile, Moody’s said the credit ratings of California’s municipal electric utilities remain stable because most have limited financial exposure to PG&E.

San Luis Obispo County said it had received a partial payment on property taxes due yesterday from PG&E.

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