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Wednesday August 7, 6:06 pm Eastern Time, Reuters Company News

S&P cuts California power projects to junk status

LOS ANGELES, Aug 7 (Reuters) - Standard & Poor's on Wednesday cut the ratings of some power projects that supply Southern California Edison to "junk" status, citing uncertainty about the utility's own longer-term credit standing.

The rating agency noted improvements in the credit strength of the Rosemead, California-based utility, a unit of Edison International (NYSE:EIX - News), but said it was "still impossible to determine SCE's long-term credit-worthiness."

SCE, which a year ago was on the brink of bankruptcy, is currently rated BB by Standard and Poor's, a non-investment or junk rating. The projects were cut to BB from BBB-minus, the lowest investment grade.

"The projects really derive their credit from SCE," Standard and Poor's analyst Peter Rigby told Reuters, noting they rely heavily on the utility for capacity payments.

In March, Standard and Poor's raised the utility's corporate credit rating to BB from D after it paid $4.8 billion to creditors, clearing much of the debt it incurred at the height of the state's power crisis last year.

The downgrade impacted Edison Mission Energy Funding Corp., a finance vehicle for Edison Mission Energy's Big Four co-generation projects in California.

Edison Mission Energy (EME) is a merchant power plant owning unit of Edison International. The cut did not impact EME's main rating, which remained low investment grade.

"Edison Mission Energy Funding is an entity down the family tree from Edison Mission Energy. It is a one project company and nothing is triggered here by a drop to BB," Edison International Chief Financial Officer Ted Craver told Reuters.

Such a move could trigger the accelerated repayments of some company debt and force the company to post collateral on some trading positions.

Edison Mission Energy itself, however, continues to be rated BBB-minus, the lowest investment grade, S&P said.

In March, Standard and Poor's raised SCE's corporate credit rating to BB from D after it paid $4.8 billion to creditors, clearing much of the debt it incurred at the height of the state's power crisis last year.

OTHER PROJECTS CUT

Other projects that saw their ratings cut on Wednesday were Salton Sea Financing Corp. and FPL Energy Caithness Funding Corp., both of which supply power to SCE but are otherwise unaffiliated with Edison International.

Standard and Poor's noted in its statement that a deal struck between SCE and state regulators "removes the immediate but not the long-term threat of a bankruptcy filing."

The pact allows the utility to collect $3.6 billion in past power purchases costs from customers. It was initially forbidden from fully passing on those costs due to a price freeze imposed under California's power deregulation.

The company said earlier that as of June 30 it had collected $2.0 billion of the $3.6 billion.

Craver said Standard and Poor's concerns appeared related to the absence of clear rules about how the utility will recover its power purchase costs in the future.

"They are not as concerned about past under-recovery and more focused on the utility getting good rules relating to (future) procurement," he said.

The California Department of Water Resources currently buys power for the state's three investor owned utilities after skyrocketing prices in 2000 and early 2001 resulted in the state's largest utility, PG&E Corp. (NYSE:PCG - News) unit Pacific Gas & Electric filing for Chapter 11 bankruptcy protection.

California wants its utilities to resume buying power for their customers when they regain credit-worthiness. The rules under which that would happen, however, are not yet agreed.

Craver said that if Calif. Gov. Gray Davis signs Assembly Bill 57, which has been passed by state lawmakers, "it would be constructive from a credit standpoint."

The bill deals with the rules under which the utilities would return to buying power. A key feature is the elimination of "after-the-fact" reasonableness reviews and mechanisms that seek to ensure the "timely" recovery of utility costs through customer rates.

Edison International shares closed up 12 cents or one percent at $11.90 on the New York Stock Exchange on Wednesday.