Thanks to a rate increase and natural gas price drop, the utility’s improved cash flow may cover its electricity costs.

Los Angeles Times

For the first time in months, Southern California Edison is collecting more money than it is spending on electricity, a shift that could enable the utility to avoid bankruptcy without a state intervention as dramatic as the proposed $ 2.8-billion purchase of the company’s transmission lines.

The turnabout has come during the last several weeks as natural gas prices–a major component in the cost of electricity–have plummeted and as Edison has collected more money from customers through a record increase in rates approved by state regulators.

The utility this month expects to collect more than it will spend on electricity–the first time that has happened since the state’s power crunch started in May 2000. If the trend holds, Edison would be able to cover several hundred million dollars in losses that piled up after Feb. 1 from its purchases of electricity, said executives at the Rosemead-based company.

Edison‘s relief comes against a backdrop in which the California power crisis appears to be easing, as consumers conserve energy, new power plants come online and wholesale prices moderate from the high levels of last winter.

The executives said that barring an unusually severe heat wave, which would prompt customers to crank up energy-guzzling air conditioners, or another spike in natural gas prices, Edison by early next year also could make payments on a proposed bond offering to pay down its $3.5 billion in debt from energy purchases before Feb. 1.

Creditors of the utility and consultants working with the governor’s office agree that such a scenario could mean that Edison would be able to stay out of U.S. Bankruptcy Court without the state buying the company’s transmission lines, which is a key element in Gov. Gray Davis‘ now-stalled proposal to rescue the utility.

Jim Scilacci, the utility’s chief financial officer, has hinted at improving company finances during conference calls with creditors holding $931 million in defaulted bonds and notes in recent weeks. Investors have responded positively, boosting the company’s depressed stock price about 45% in the last six weeks to a Thursday close of $14.70 on the New York Stock Exchange.

Although Edison‘s cash flow may be enough to cover its electricity costs, its huge debts keep it far from solvency. Moreover, the company still faces two wild cards in its fight to avoid bankruptcy: California’s own claims on that cash and the utility’s uncertain prospects of gaining state approval to use the money to repay its debts.

The Department of Water Resources is buying electricity for 27 million Californians served by Edison and the state’s two other regulated utilities. The agency could disclose as soon as today how big a slice it will take from Edison‘s rate collections to repay a proposed $13.4-billion bond offering to cover the state’s purchases.

The water agency began buying electricity from private generators in January, after Edison and Pacific Gas & Electric Co., the Northern California utility, became mired in debt. PG&E went on to file for bankruptcy protection in April.

“What this means for Edison all depends on how much money it can keep,” said Paul Patterson, an analyst with investment bank ABN Amro in New York.

The water department’s requirements could eat up much of the margin that has provided Edison with its small cushion this month. However, Joseph Fichera, chief executive of Saber Partners, which is advising the governor, said the latest numbers indicate that there is enough money in current rates to implement the governor’s plan to pay for the utility’s debt as well as the state’s current and future power purchases.

Even if the water department allocation still left room for Edison to pay off its debts, such a course of action would require approval by the state Legislature and the Public Utilities Commission. Although energy trends appear to allow the utility to regain its financial footing, analysts cautioned that the utility still could find itself in Bankruptcy Court if the state doesn’t provide a method for Edison to pay its debts.

“While we might be able to cover our costs going forward, it is equally important that we have a way to pay off that $3.5-billion debt,” said Brian Bennett, an Edison vice president. “But without knowing what [the water department’s] revenue needs are, we won’t know what is left over in rates to cover our costs.”

Bennett blamed the utility’s so-called under-collection–debts that piled up as frozen consumer rates could not cover soaring wholesale electricity costs–on what he called “flawed regulatory policies.”

Based on recent energy prices, Bennett said, “We are just only beginning to repay the under-collection.”

The recently enacted rate increases, which kicked in last month, have pushed what Edison can charge customers for the electricity component of their bills from about 7 cents a kilowatt-hour to 10.27 cents.

At the same time, declining natural gas prices have sliced in half what the utility must pay to a group of small and alternative-energy companies that generate about 27% of its electricity needs. Edison, for example, paid this group 18.6 cents a kilowatt-hour in February. That dropped to 13.6 cents by May and now stands at about 7.5 cents. Each penny decline in the cost of electricity from this group of generators represents more than $200 million in savings for Edison on an annual basis.

Bennett cautioned that if the water department requires additional funds or if Edison‘s energy costs were to turn upward again, “then rates once again may not be adequate to cover our generation costs. It is therefore imperative that this uncertainty in the rate structure be cured now so we establish predictable, stable rates for our customers.”

Three plans to aid Edison to varying degrees are working their way through the Legislature, though late Thursday it appeared none would be approved before lawmakers adjourn for a summer recess. Several legislators have said they are content to let Edison join PG&E in bankruptcy.

Any plan that would allow Edison to use a portion of the rates it is collecting to pay off a bond offering would meet the objection of some consumer groups, which label the concept a corporate bailout.

“Just as the utilities gambled on deregulation and were winners at first, Edison now has to be responsible for its losses,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. He said Bankruptcy Court is the most appropriate place for Edison to resolve its financial problems.

Several creditors of the utility, however, said that as long as Edison can tread water or even work down its debts, there is little incentive to put the company into bankruptcy, which would only add another legal layer and more expenses to an exceptionally complicated situation.

Creditors could move against the company if they believed its finances were declining and thus shrinking the amount of cash and assets that could be distributed in a bankruptcy proceeding. They also could put Edison into involuntary bankruptcy if some creditors exacted payment from the company ahead of others that are owed money.