California utilities still knee deep in cow puckey?
interactive.wsj.com
March 30, 2001
Heard on the Street
Rate Increase May Not Give
Juice to California's Utilities
By JOHN R. EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL
Earlier this week, news of a whopping electricity-rate increase in California
produced a predictable stock-market response: Shares of PG&E and
Edison International soared some 30% as investors saw visions of fresh
billions helping companies that have been nearly driven to bankruptcy court
by the state's power crisis.
Now for the bad news.
The actions by the California Public Utilities
Commission to raise rates "do not offer a
comprehensive solution, fail to resolve the uncertainty of the crisis, and may
even create more instability." That nabob of negativism comes not from a
Wall Street bear but from Gordon R. Smith, president and chief executive
of PG&E's Pacific Gas & Electric utility unit.
In a little-noticed statement issued late Tuesday night, after the PUC's rate
action earlier that day, Mr. Smith laid out a litany of problems that he
believes regulators either failed to resolve or exacerbated. PG&E officials
declined to comment beyond the statement.
Mr. Smith's statements could be viewed as a self-serving attempt to win
more relief for his utility and its investors. And utility executives traditionally
downplay rate boosts, so as not to anger consumers or regulators. Still,
some on Wall Street say Mr. Smith has cause for unhappiness in this case.
"Everyone has been saying 'Whoopee, this is great for the utilities.' I don't
agree," says Susan Abbott, a managing director at Moody's Investors
Services, the big credit-rating agency.
For one thing, says Ms. Abbott,
many people don't seem to realize
that the money supposed to be
produced by the rate increase, an
estimated $4.8 billion annually, is
principally earmarked to go to the
state to reimburse it for power it will
be buying -- not to help the utilities
pay off debt to power suppliers that
have been cutting the two California
utilities slack since late last year for
unpaid bills. State officials have
already asked the Legislature for
authority to spend $4.7 billion on
electricity.
In January, the state began buying
large amounts of power in place of
the financially beleaguered utilities, which had accumulated billions of
dollars in debt as the result of skyrocketing wholesale electric-power costs
that they couldn't pay off through existing rates.
Merrill Lynch analyst Steve Fleishman says that he, like others, initially was
buoyed by the news of the PUC actions. But as he learned details of the
rate-increase plan, he too concluded that "none of the rate increase can in
any way go to deal" with the accumulated liabilities. He now thinks the
market overreacted on the upside to the rate-rise news. While the rate rise
will help bolster the state's overall electricity-buying capacity, the utilities
"are still far from being out of the woods," Mr. Fleishman says.
So far, the stocks of the two utilities have largely kept their gains. In
composite trading as of 4 p.m. Thursday on the New York Stock
Exchange, PG&E shares fell 58 cents to $12.62, and Edison stock
dropped 59 cents to $13. On Friday, before the rate news hit, the stocks
traded at $10.65 and $11.20, respectively.
Earlier this month, PG&E warned investors that it may have to take a
write-off of as much as $4.1 billion in connection with accumulated
liabilities, while Edison estimated a potential charge of as much as $2.7
billion. Such steps by both companies would further complicate
already-strained relations with creditors, as well as possibly make any
eventual recovery more difficult.
The moment of truth is near: The companies face an initial deadline
Monday for reporting their much-delayed fourth-quarter results, which will
have to address the issue of their accumulated debt.
Both companies have been delaying reporting their fourth-quarter results
for 2000, largely due to the continuing uncertainty over how to treat their
huge unfunded liabilities. Under reporting requirements of the Securities
and Exchange Commission, the companies are supposed to file their annual
reports, which would include fourth-quarter figures, by Monday. However,
companies can apply for a one-time, 15-day extension, says an SEC
spokesman.
A PG&E spokesman says the company plans to apply for an extension
and that it has postponed its annual meeting to May 16 from mid-April. An
Edison spokesman says that his company would announce on Monday
whether it plans to seek an extension for reporting results.
If reactions to the rate-rise decision are an indication, PG&E might be
deeper in the woods than Edison, parent of Southern California Edison
Co., the other main California investor-owned utility. Bruce Foster, an
Edison vice president, says that while his company has some problems
with the PUC actions, they were a "good first start towards getting the
financial health of the utilities back in order."
Edison, based in Rosemead, Calif., seems to have a clearer exit strategy
from its current financial mess than does its bigger fellow utility to the north.
Last month, Edison reached an agreement in principle under which the
state would buy its electricity-transmission system for $2.76 billion.
Completing this transaction could give Edison a big cash influx to use for
paying down its past debts.
PG&E has also been talking with the state about selling its transmission
system. But the San Francisco-based company has been publicly much
more negative about the idea than Edison. Besides the stated desire by
PG&E officials to keep what long has been viewed as an integral part of
operations, the company might also worry that it wouldn't realize enough
from such a sale to make a serious dent in its piled-up bills, which currently
stand at $6.3 billion. For one thing, PG&E's retail rates have been lower
than Edison's, leaving it with a correspondingly bigger tab.
PG&E "has a much bigger program of things it needs to take care of" than
Edison, says Ed Schuller, director of equity strategy at Sutro. However,
some analysts argue that PG&E, overall, has a stronger asset base than
Edison from which to operate, a strength that could give it more flexibility
in the long run.
California officials could provide PG&E and Edison with new headaches in
the weeks ahead. The PUC is in the midst of examining the
holding-company structure under which the parent firms and their utility
subsidiaries operate. State political leaders and others have raised
questions about whether some of the billions of dollars that have gone from
the utilities to the parent companies in recent years should be returned.
PG&E and Edison officials say the transfers were perfectly proper and
used for dividend and tax payments, among other things.
However, analysts say, most of the companies' current stock-market value
rests with their nonutility subsidiaries, which are engaged in such activities
as operating power plants outside of California. Any attempt by state
officials "to grab value out of" the nonutility units "is a problem" for
investors, says Merrill Lynch's Mr. Fleishman.
Write to John R. Emshwiller at john.emshwiller@wsj.com
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