Message-ID: <16580596.1075844198567.JavaMail.evans@thyme> Date: Wed, 11 Apr 2001 06:18:00 -0700 (PDT) From: issuealert@scientech.com Subject: SCE Agrees to Sell Transmission Assets to California Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "SCIENTECH IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Richard_Shapiro_June2001\Notes Folders\All documents X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf Today's IssueAlert Sponsors:=20 [IMAGE] The CIS Conferencec provides utility management personnel unequaled insight= =20 and current information on Customer Relationship Management (CRM),=20 E-Commerce, Technologies and Marketing. Fifty-four sessions conducted by=20 utility industry representatives will focus on issues facing the industry.= =20 Over 100 companies will exhibit the latest technologies and services.=20 Former President George Bush is our Honored Keynote Speaker=20 www.cisconference.org=20 Which e-commerce energy provider had over 600,000 customers in nine states = at=20 the end of 2000 and expects to become the largest unregulated electricity= =20 and gas marketer in the U.S. in the first half of 2001? SCIENTECH'S=20 E-Commerce InfoGrid provides the answer and gives you much more to stay =20 informed. Purchase your InfoGrid today at www.scientech.com or contact Chr= is=20 Vigil, toll-free at (888) 972-8676 for more information.=20 [IMAGE] In an exclusive SCIENTECH PowerHitters Interview, Cody Graves, CEO of=20 Automated Energy, Inc. and former Chairman of the Oklahoma Corporation=20 Commission, discusses the status of restructuring in Oklahoma and=20 nationwide. Graves also discusses the role Automated Energy is playing in= =20 providing an essential piece of the restructuring pie. Read more at:=20 www.scientech.com=20 [IMAGE] [IMAGE] April 11, 2001 SCE Agrees to Sell Transmission Assets to California=20 by Will McNamara=20 Director, Electric Industry Analysis At a joint press conference with Governor Gray Davis, Edison International= =20 Chairman, President and CEO John Bryson announced agreement on a plan to=20 restore Southern California Edison (SCE) to financial health. "The negotiat= ed=20 resolution with the Governor is far preferable for our company, our employe= es=20 and for our customers than is going into bankruptcy," Bryson said. The key= =20 part of the agreement is that the state will receive a primary utility asse= t=01* SCE's 12,000 mile transmission system. SCE employees will operate and=20 maintain the system through a contractual arrangement with the state.=20 Analysis: Only days after Pacific Gas & Electric Co., its California utilit= y=20 counterpart, declared bankruptcy, SCE announced what is being billed as a= =20 pact with the State of California that should keep it out of bankruptcy=20 court. From all appearances, this seems to be a strong deal for SCE, as it= =20 not only keeps the utility financially solvent but also removes it from a= =20 line of business that remains rather uncertain and financially unrewarding.= =20 First, let's establish the key aspects of the agreement. Keep in mind that= =20 the California Legislature, the California Public Utilities Commission (CPU= C)=20 and federal regulators must approve this deal. Edison International (NYSE:= =20 EIX), the parent of SCE, has agreed to sell the utility's transmission asse= ts=20 to the State of California for $2.76 billion. The confirmed price tag that= =20 the state is paying for SCE's lines seems like a generous offer because it = is=20 about 2.3 times the system's current book value of $1.2 billion (the origin= al=20 cost, less any accumulated depreciation (OCLD) recorded in SCE's books).=20 Since transmission rates are based on an allowed rate of return on OCLD, it= =20 is uncertain that SCE's current transmission rates will provide sufficient= =20 revenues for the state to cover its purchase cost.=20 The sale includes only SCE's transmission assets. It appears that SCE will= =20 remain in the distribution business and continue delivering power to=20 customers and running generation. Both the state and SCE have agreed to=20 commit to no less than $3 billion of capital investment in utility=20 infrastructure over the next five years, which presumably includes upgrades= =20 to the transmission system and new generation capacity. It is not entirely= =20 clear at this time how the $3 billion in capital investment will be shared= =20 between the State of California and SCE.=20 Edison officials also have agreed to sell cost-based (not market-based)=20 electricity to the state from power generated at SCE plants. Edison Mission= =20 Energy, the unregulated subsidiary of Edison International, is also obligat= ed=20 to sell output from its Sunrise power plant exclusively to California under= =20 cost-based pricing. Although SCE divested much of its power assets under=20 agreements with the CPUC, it still shares ownership of the San Onofre Nucle= ar=20 Plant Units 1, 2 and 3 with San Diego Gas & Electric (SDG&E), and shares in= =20 the Palo Verde, Mohave and Four Corners generating stations. SCE also owns= =20 hydroelectric facilities and the Pebbly Beach generating facility. The=20 Sunrise Mission power project is a gas-fired power plant that is currently= =20 under construction. Reportedly, the Sunrise plant is expected to provide=20 about 320 MW of electricity during peak periods of demand this summer.=20 According to the Memorandum of Understanding between SCE and the California= =20 Department of Water Resources, "SCE's generation assets=01*including all en= ergy,=20 capacity, ancillary services, and any combination thereof=01*will be commit= ted=20 to cost-based ratemaking for SCE's bundled service customers." In addition,= =20 SCE is prohibited from selling any of these generation assets until Dec. 31= ,=20 2010.=20 Also included within the agreement is SCE's commitment to dismiss all pendi= ng=20 lawsuits against the CPUC related to market prices in California. Edison=20 International also has agreed to refund $400 million to the utility unit th= at=20 reportedly had been paid in dividends to the parent company.=20 The $2.76 billion that the state is paying SCE for its transmission assets= =20 can be used to pay pre-existing debt to creditors, including power generato= rs=20 that have previously sold power to SCE. This is the essential benefit that= =20 the utility receives in the deal and it is a considerable achievement given= =20 that the liquid capital theoretically should stave off bankruptcy=20 proceedings. It is also important to note that this is the first revenue=20 stream that has been specifically earmarked for SCE's pre-existing debts.= =20 Recent rate increases that have been approved by the CPUC can only be appli= ed=20 to subsequent debts incurred by the utility. In addition, SCE will be allow= ed=20 to issue bonds to recover a "substantial portion" of the approximate $5=20 billion in debt that the utility has accrued due to uncollected purchases o= f=20 wholesale power. The agreement should return SCE's debt to investment grade= ,=20 making it easier for the company to raise money to fund future operations. = By=20 reducing its debt load, Edison CEO John Bryson remains confident that SCE= =20 "can borrow to pay out [remaining] debts."=20 SCE Chairman and CEO Stephen Frank expressed confidence that a final=20 agreement could be reached "before the end of the year," although the=20 California Legislature reportedly has agreed to expedite its own review of= =20 the agreement and provide approval before summer temperatures begin to wrea= k=20 havoc on the California market. If for any reason the sale of the=20 transmission assets has not been completed within two years, SCE is obligat= ed=20 to sell to the state its hydroelectric generation facilities instead (at a= =20 to-be-determined price). Although the deal is expected to proceed, some=20 concerns have been raised about federal issues related to interstate=20 commerce. In addition, the fact that Pacific Gas & Electric Co.=01*with whi= ch=20 SCE has often been intertwined=01*remains in bankruptcy court could also=20 complicate the agreement between SCE and the state. =20 News of the agreement immediately caused Edison shares to increase by about= =20 $2.16, or 24 percent, to $11.08 on April 9. As of the close of trading on= =20 April 10, Edison shares were priced at about $11.38. =20 For its part, SCE said that it was "racing toward" an agreement with the=20 governor to avoid being forced into an involuntary bankruptcy. Yet, for som= e=20 time, SCE has been more willing to sell its transmission assets than PGOeve= r=20 appeared to be. In fact, I wrote in the 2/26/01 IssueAlert that Gov. Davis= =20 had reached an "agreement in principle" with SCE regarding the sale of the= =20 transmission lines. Most of the key elements of the agreement that has been= =20 agreed to by both parties have been in the works for over two months. =20 PGOCorp. issued a statement that it was pleased that SCE had been able to= =20 reach an agreement with Gov. Davis, but said that the agreement did not=20 change its own direction toward bankruptcy court. According to a report on= =20 CBS.MarketWatch.com, Fitch analysts have suggested that the sale of SCE's= =20 transmission assets to the state of California could in fact lend a=20 "framework" that might be used in Pacific Gas & Electric Co.'s bankruptcy= =20 proceedings. What this might mean is that Federal Judge Dennis Montali, the= =20 official overseeing Pacific Gas & Electric Co.'s bankruptcy, might rely upo= n=20 the agreement between SCE and the State of California to mandate a similar= =20 deal for PG&E. Gov. Davis commented that the SCE deal could serve as a bas= is=20 for separate agreements with SDG&E, and eventually PG&E, if they choose to= =20 come back to the negotiating table. In fact, the state could submit a plan = to=20 Judge Montali outlining a purchase of PG&E's transmission assets, which the= =20 judge could ultimately enforce.=20 An argument could be made that the agreement SCE has reached with the State= =20 of the California provides benefits to the utility that go beyond protectin= g=20 it from bankruptcy. One could argue that SCE benefits by being able to exit= =20 the transmission business altogether, which in many ways can cause tremendo= us=20 problems for the companies that choose to remain in this business.=20 Transmission operations also typically offer a low rate of return; in SCE's= =20 case, according to its most recent 10K filing, its transmission business=20 resulted in a return on equity of 9.68 percent. SCE had proposed that the= =20 return on equity for its transmission assets be set at 11.6 percent, which= =20 FERC rejected (FERC has ultimate authority over transmission service=20 pricing). Thus, the question could be raised of why SCE would even want to= =20 remain in the transmission business, given this low return on equity. Behin= d=20 the scenes, SCE could very well have previously made the determination that= =20 its transmission business was not a valuable part of its overall operation.= =20 This could be representative of an international trend, as regulatory=20 agencies in Australia and Great Britain have also set lower limits on the= =20 average transmission network charges that utilities can implement.=20 Moreover, the State of California does not bring extensive operational=20 expertise to its new role as a transmission owner. Thus, the state is wise = to=20 keep SCE employees in charge of the operation and maintenance of the=20 transmission system. This substantially reduces the risk for the state, whi= ch=20 is a prudent move. From the state's perspective, it gets an asset in exchan= ge=20 for a bailout, which makes its investment in SCE beneficial. However, the= =20 transmission business will present unique challenges for the state, such as= =20 raising capital for transmission improvements and siting procedures. The=20 state may quickly learn why the transmission business is perceived as being= =20 so challenging, and why it is difficult to entice companies to build new=20 transmission lines (especially considering the low rate of return that the= =20 transmission business offers). On the other hand, by assuming the role of a= =20 transmission system owner, the State of California will be in a position to= =20 obtain competitive information about the activities of power generators in= =20 the state. This could result in a significant advantage for the State of=20 California if it remains in its current power-buying role. =20 An archive list of previous IssueAlerts is available at www.scientech.com Reach thousands of utility analysts and decision makers every day. 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The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. =20 Copyright 2001. SCIENTECH, Inc. All rights reserved.