Moody’s Investors Service Wednesday again downgraded the merchant energy arm of Rosemead, CA-based Edison International for about $5.8 billion in debt securities and bank credit facilities. The rating outlook for Irvine, CA-based Edison Mission Energy (EME) and two of its affiliates remains “negative.” Moody’s removed the companies from review for further downgrade.

A spokesperson for the parent company said EME is “disappointed” by Moody’s latest action, particularly in light of what the company thought were better-than-expected first quarter results, albeit still a loss for the quarter. The spokesperson stressed that the rating changes are not expected to cause any defaults on existing debt that the subsidiaries have outstanding, nor are they going to trigger any prepayments with respect to the debt downgrades.

There also will be no negative impact on the credit ratings or financings of the parent or its utility subsidiary, Southern California Edison Co., which is still struggling to regain its investment-grade credit rating.

Moody’s said the downgrade reflects: (1) high consolidated debt relative to operating cash flow, (2) a significant amount of debt at EME’s and Mission Energy Holding’s various projects, (3) growing reliance on the merchant (as opposed to fixed-contract) market for future revenues, (4) dividend restrictions on EME projects, and (5) limited opportunity for significant debt reduction.

“EME’s performance, while improving during the first quarter 2003 and during 2002, remains weak with operating cash flow representing only 7% of total consolidated debt,” Moody’s said in its downgrade announcement. “EME’s business profile will continue to be highly dependent upon cash flows generated by merchant energy sales, principally in the United States.”

Moody’s said of particular concern are what it called “projected cash flows coming from Midwest Generation, which in some years could represent as much as 40% of EME’s distributed cash flow,” and up to $330 million in cash in currently “trapped” in Midwest Gen, unavailable for dividend.

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