California Crisis Sends Ripples Across Wall Street
The volatility in the California energy market finally spilled
over into the stock market last week. The uncertainty over the
financial health of California's two largest utilities, Southern
California Edison and Pacific Gas and Electric, triggered panic on
Wall Street over the potential impact on many other energy
companies and even some utility lenders.
Energy stock prices fell sharply during the middle of the week
and then regained some ground on Friday after several major
nonutility generators with relatively large positions in California
stated publicly that they would feel little or no ripple effect
from the downfall of two major utilities.
The utilities at the center of it all got a weak short-term
prescription for their terminal illness on Thursday when the
California Public Utility Commission approved a 90-day, 1 cent/kWh
surcharge to help them begin to recover $11 billion in overpayments
for wholesale power.
Credit rating agencies said the surcharge probably would not be
enough to prevent insolvency. Fitch lowered the credit ratings of
the utilities' securities to junk bond status, below investment
grade, while Moody's and Standard & Poor's were somewhat more
restrained, lowering ratings to a notch above junk grade. Both
Moody's and S&P, however, said a further downgrade was possible
unless the state legislature, which is in a special session, steps
in to save the utilities from bankruptcy with a rate hike and/or
special bond deal. The downgrades could shut the utilities out of
debt capital markets, leaving them to rely on the state for
S&P excluded PG&E's Transmission Northwest unit and
SoCal Ed's Mission Energy from the downgrading, affirming the
current ratings of those units. Also, Transmission Northwest will
take the place of PG&E Corp. as the backer of its holdings
group trading operations. These units, S&P said, were "fenced"
off, legally and structurally from actions of the parent companies.
S&P also affirmed the ratings of Sempra Energy, saying that
costs are being passed through to customers of subsidiary San Diego
Gas & Electric.
Investors pondered the potential implications for the energy
group as a whole and even the nation's economy. Even the share
prices of energy companies with little or no exposure to the
California crisis were hit hard. Big oil companies fell sharply
Wednesday. Share prices for KeySpan Corp., a New York gas utility,
dropped 9% Thursday to $36.31. Shares of NiSource, one of the
largest eastern combination utility companies, fell 7%. Utilicorp,
an energy marketer and combination utility company in the
Midcontinent region, saw its share prices plummet 11%. In
comparison, share prices of Edison and PG&E dropped by 12% and
30%, respectively, on Thursday, continuing massive declines to near
$10/share from 52-week highs above $30.
"I've had better days," said UBS Warburg Energy Analyst Ronald
J. Barone on Thursday. "All the major marketers have significant
reserves in the event of a bankruptcy. I don't think it's that much
of a major impact upon the marketers. I tend to think the market is
"You've got Coastal down 7%, El Paso down 6%. Equitable, which
doesn't do any business in California, is down 4%. I just think
it's indiscriminate wholesale selling. I think California is
probably 80% responsible." He noted that gas futures were up
Thursday despite forecasts of warm weather. "I do expect a rebound
but whether that happens tomorrow or two weeks down the road I just
The energy companies even publicly downplayed the impact of the
California crisis on the broader energy market. Some generators
indicated bankruptcy might not be a bad idea because it would
guarantee eventual payment of the high energy costs.
In a hastily-called teleconference Thursday morning prompted by
a sharp 20% drop in its share price, Dynegy officials said all the
generators in the state would get "credit deals in a bankruptcy
scenario to get paid for future power, and [the utilities] are
going to need the same amount of power that they needed last year.
"If you look at the forward prices in California for the third
quarter they are $270 to $300/MWh," said Dynegy President Steve
Bergstrom. "That tells you the market is going to continue to be
short. Even in a bankruptcy scenario they are going to continue to
pay us value for the power," he said. If the California utilities
do go bankrupt, it's not a matter of "if but when generators will
collect their money."
He said Dynegy's financial exposure to the potential financial
train wreck is "insignificant" in its overall financial picture.
"There's a big misconception and some misreporting on our
California exposure. Our exposure is 10-12% of our margin for 2001.
Even in the bankruptcy scenario, that doesn't go away. In fact, the
bankruptcy exposure is really limited to a 60- to 90-day
receivable." He said the short-term potential impact would be in
"cents per share rather than nickels per share."
Bergstrom noted that in the fourth quarter Dynegy did not run
its California power plants very much because of required
maintenance. He also noted that Dynegy's exposure is limited by its
generation partnership with NRG.
Financial Flood of Red Ink
The company's remarks on California, however, contrasted sharply
with the dire predictions Dynegy made to the Federal Energy
Regulatory Commission (FERC) in December. In an emergency motion
regarding the utilities' creditworthiness, Dynegy told FERC it
could "incur $10 million per day in short-run variable costs that
the utilities say they are unable to pay. If generators are
required to continue incurring such high out-of-pocket costs to
provide power to the state of California with no real prospects of
recovery, the result will be not only an unconstitutional taking
but ultimately the collapse of the entire supply chain," the
company said. "At some point, the financial flood of red ink would
sweep even more broadly towards numerous companies up the supply
chain, including fuel suppliers, seller of emissions credits,
lenders, service providers and equipment vendors, seriously
affecting the economy of the Western Interconnection and perhaps
In its conference call last week, however, Dynegy said it
expects to significantly beat its fourth-quarter earnings estimates
of 22 to 25 cents per share, and should hit the upper range of
estimates for 2001 because of its diversified portfolio of assets
and activities and its minimal exposure to the California crisis.
Bergstrom was careful to note that although Dynegy is not likely to
suffer from California's problems, it also is not likely to profit
significantly. Its earnings growth is coming from other areas such
as gas and propane sales and power generation sales in other
Following the Dynegy conference call, the company's share price
regained a lot of the ground it had lost initially but still
settled down $3, or about 6%, to $45.75/share for the day Thursday.
Its shares were up 5% by mid-day Friday to $47.75.
Duke Energy, another one of the unregulated power producers in
the state, watched its share price decline from the mid $80s last
month to the low $70s last week. On Thursday, the company also
publicly announced that its exposure to the crisis was minimal.
Duke said 90% of its generation in California has been sold forward
to a "diversified portfolio of non-utility buyers, who have strong
balance sheets and good credit ratings." In addition, Duke said it
has credit limits and collateral agreements in place. It has some
longer-term contracts with the regulated California utilities at
attractive prices but believes its credit practices have positioned
it well in the event of credit failure.
Also displaying no ill effects from the crisis was San Jose,
CA-based Calpine Corp., which operates 26 power plants throughout
northern California generating over 1,200 MW of electricity. On
Friday, Calpine increased its diluted earnings per share estimates
for the quarter and year ended Dec. 31 to $0.30 and $1.05 per
share, respectively. The company's stock price was up nearly 10% to
$35.62 by mid-day on Friday after having dipped below $30/share on