Energy stocks took a pounding yesterday mainly in reaction tocontinuing uncertainty over the financial health of California’stwo largest utilities, Southern California Edison and Pacific Gasand Electric, which got a weak short-term prescription by stateregulators (see related story this issue).
The California Public Utility Commission approved a 1 cent/kWhrate increase for the two utilities for 90 days, but credit ratingagencies and the utilities themselves said it was not enough. Fitchlowered the credit ratings of the utilities’ securities to junkbond status, below investment grade. Standard and Poor’s loweredits ratings to one notch above speculative grade and said a furtherdowngrade was possible unless the state legislature, which is in aspecial session, steps in to save the utilities from bankruptcy.
The sickness infecting California’s energy market even spread tothe share prices of energy companies with no exposure at all toCalifornia. Share prices for KeySpan Corp., a New York gas utility,dropped 9% to $36.31. Shares of NiSource, one of the largesteastern combination utility companies, fell 7% to $27.12.Utilicorp, an energy marketer and combination utility company inthe Midcontinent region, saw its share prices plummet 11% to $26.In comparison, share prices of Edison and PG&E, which maydeclare bankruptcy following yesterday’s small interim rate hikegranted by regulators, dropped by 12% and 30%, respectively.
“I’ve had better days,” said UBS Warburg Energy Analyst RonaldJ. Barone. “All the major marketers have significant reserves inthe event of a bankruptcy. I don’t think it’s that much of a majorimpact upon the marketers. I tend to think the market isoverreacting. 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 thinkCalifornia is probably 80% responsible.” He noted that gas futureswere up yesterday despite forecasts of warm weather. “I do expect arebound but whether that happens tomorrow or two weeks down theroad I just don’t know.”
In a hastily-called teleconference yesterday morning prompted bya sharp 20% drop in its share price, Dynegy officials said thecompany’s financial exposure to the potential train wreck in theCalifornia power market is “insignificant” in its overall financialpicture. Following the Dynegy conference call, the company’s shareprice regained a lot of the ground it had lost initially but stillsettled down $3, or about 6%, to $45.75/share.
Duke Energy also said its exposure was minimal, stating that 90%of its generation in California has been sold forward to a”diversified portfolio of non-utility buyers, who have strongbalance sheets and good credit ratings.” In addition, Duke said ithas credit limits and collateral agreements in place. It has somelonger-term contracts with the regulated California utilities atattractive prices but believes its credit practices have positionedit well in the event of credit failure.
“There’s a big misconception and some misreporting on ourCalifornia exposure,” said Dynegy President Steve Bergstrom. “Ourexposure is 10-12% of our margin for 2001. Even in the bankruptcyscenario, that doesn’t go away. In fact, the bankruptcy exposure isreally limited to a 60- to 90-day receivable.” He said thepotential impact would be in “cents per share rather than nickelsper share.”
Bergstrom noted that in the fourth quarter Dynegy did not runits California power plants very much because of requiredmaintenance. He also noted that Dynegy’s exposure is limited by itspartnership with NRG. “Our earnings from California for the fourthquarter were relatively small,” he said.
The company’s remarks on California, however, contrastsignificantly with the dire predictions Dynegy made to the FederalEnergy Regulatory Commission (FERC) in December. In an emergencymotion regarding the utilities’ creditworthiness, Dynegy told FERCit could “incur $10 million per day in short-run variable coststhat the utilities say they are unable to pay. This is not asustainable situation,” Dynegy said. “If generators are required tocontinue incurring such high out-of-pocket costs to provide powerto the state of California with no real prospects of recovery, theresult will be not only an unconstitutional taking but ultimatelythe collapse of the entire supply chain.
“At some point, the financial flood of red ink would sweep evenmore broadly towards numerous companies up the supply chain,including fuel suppliers, seller of emissions credits, lenders,service providers and equipment vendors, seriously affecting theeconomy of the Western Interconnection and perhaps the nation.”
In the conference call yesterday, however, Dynegy officialsdownplayed the potential impact on the major generators andmarketers, saying all the generators in the state would get “creditdeals in a bankruptcy scenario to get paid for future power, and[the utilities] are going to need the same amount of power thatthey needed last year.
“If you look at the forward prices in California for the thirdquarter they are $270 to $300/MWh. That tells you the market isgoing to continue to be short. Even in a bankruptcy scenario theyare going to continue to pay us value for the power,” saidBergstrom. If the California utilities do go bankrupt it’s not amatter of “if but when generators will collect their money.”
Dynegy said it expects to significantly beat its fourth-quarterearnings estimates of 22 to 25 cents per share, and should hit theupper range of estimates for 2001 because of its diversifiedportfolio of assets and activities.
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