Fallout From Utility Crisis Sends Bank Stocks Falling

Financial fallout from the state’s utility crisis spread to the lending industry Friday, as Wall Street battered the stocks of Bank of America and other major banks amid fears they will suffer sizable losses on loans to Edison International and PG&E; Corp.

Edison, meanwhile, took another dramatic step to conserve cash by announcing plans to slash 1,450 jobs at its core Southern California Edison division--on top of a 400-job reduction announced last month--to help cut $365 million more in the Rosemead-based company’s annual operating costs.

Analysts cautioned that bank stocks--which had rallied in recent days--fell across the board as many investors took profits. But the utilities’ mess clearly was a factor in the decline, they said.

Bank of America also was rocked by rumors that it experienced inordinate losses from trading so-called derivatives, which are esoteric financial contracts that banks and other firms use to hedge bets on the direction of interest rates, commodities and stock and bond prices.

But the bank--which moved its headquarters to Charlotte, N.C., from San Francisco after the old Bank of America merged with NationsBank in 1998--denied the rumors. The bank also denied any recent worsening of its potential credit losses to the California utilities that could result in larger-than-forecast losses for the bank.

Even so, “there’s still a great deal of [investor] nervousness out there,” said Lawrence Cohn, an analyst at investment firm Ryan, Beck Southeast Research in Livingston, N.J. “Clearly investors are grappling with how to deal with the California utility issue.”

BofA’s stock tumbled $3.75 a share to $47.75. Shares of other banks identified as major lenders to Edison and PG&E; also fell, including J.P. Morgan Chase & Co., which fell $3.06 to $48.94; Citigroup, down $2 to $53.69; and Bank One Corp., off $1.06 to $38.75. All trade on the New York Stock Exchange.

Meanwhile, the stocks of PG&E; and Edison were mixed Friday in response to efforts by state officials to engineer a bailout for the utilities, with PG&E; shares rising 63 cents to $12.63 but Edison slipping 44 cents to $10.31, also on the NYSE.

Because of California’s 1996 deregulation of the industry, the utilities say they have been squeezed by soaring wholesale prices for power while unable to recoup those costs from their customers because retail rates are frozen.

The state Public Utilities Commission on Thursday approved an emergency 90-day customer rate hike of 7% to 15% to help Edison and PG&E; stay afloat, but the companies and Wall Street contend that the increase isn’t nearly enough to keep the utilities out of Bankruptcy Court.

Indeed, the major credit-rating agencies responded to the PUC action by downgrading Edison and PG&E; debt to or very near “speculative grade,” often dubbed junk-bond status. If all three agencies deemed the debts junk, the utilities would violate conditions of their existing loans, which could lead to creditors wanting immediate payment or the utilities’ bankruptcy filings or both.

But the downgrades are already having an effect. PG&E; said Friday that it has 90 days to improve its credit ratings or be in default under the terms of an $850-million revolving credit agreement. However, the San Francisco-based company has not yet borrowed any cash under that pact, it said in a filing with the Securities and Exchange Commission. The lenders weren’t identified.

Loan Pricing Corp., a loan-tracking division of financial service Reuters, gave an outline of the banks’ exposure to Edison and PG&E; on Friday. For instance, Bank of America arranged a $1-billion credit line for PG&E; in October, and the group that lent the cash included Chase Manhattan Bank, part of J.P. Morgan Chase; Bank One; and Citibank, the banking unit of Citigroup.

Edison also received a $680-million credit line arranged through Bank of America and Chase in May, and its Southern California Edison unit got a $200-million credit line that same month from Bank of America, Chase and Citibank, Loan Pricing said.

The service also said Edison approached Chase a few weeks ago looking for $1 billion in new financing, but that the bank declined. Edison earlier had confirmed that it had sought the loan but hadn’t identified the lead bank. The four banks declined to comment.

Those figures don’t mean Bank of America alone made those loans, only that it acted as the manager of a syndicate of banks that afforded the cash. Bob Stickler, a BofA spokesman, declined to comment on his bank’s sole exposure to Edison and PG&E;, but analysts estimate it at $300 million to $500 million.

Even if those loans sour, it shouldn’t be enough to materially affect Bank of America’s profit because the bank has adequate reserves to cover the losses, some analysts said.

The bank itself said it “remains comfortable with its guidance” about its credit problems and earnings outlook that it announced Dec. 6, when the bank said it “is budgeting for significantly higher loan losses and credit costs” in 2001.

“This is a bank with an extraordinary complex and complete reporting system, and it would be beyond belief that it could have come out with the statement it did . . . in December and have been wrong three weeks later,” Cohn of Ryan Beck said. “That’s flat-out not possible.”

But Joe Morford, an analyst with Dain Rauscher Wessels in San Francisco, cautioned that “some of Bank of America’s assumptions” about its potential loan losses “might be optimistic” if the utilities’ situation worsens. But he noted that a $500-million exposure to the California utilities is not enormous relative to the bank’s size. As of Sept. 30, BofA had total assets of $672 billion and loans and leases outstanding of $403 billion.

*

JOB CUTS

In a cost-cutting move, Southern California Edison will trim 1,450 jobs. C3