Edison Mission Energy, the power plant development arm of cash-strapped Edison International Inc., sold $600 million worth of debt securities Monday, overcoming substantial concerns about its exposure to the troubled California utility market.
Investors viewed Edison Mission, based in Irvine, as sufficiently removed from the fray to buy the notes, which mature in 10 years. But the company paid for the funding: The yield is 9.88%.
That is about 2 percentage points higher than a rival based outside of California with the same debt rating and 4.9 points above benchmark U.S. Treasury bills. The interest is considered exceptionally high for an investment-grade issuer.
While Edison Mission was set up as a "bankruptcy remote" unit separate from the parent, the risk of getting caught up in California's energy debacle deterred buyers.
"If it has a California taint to it, I'd rather not be involved," said Greg Habeeb, who didn't buy any of Edison Mission's new bonds with the $7 billion he helps manage at Calvert Group in Bethesda, Md.
Edison International owns Southern California Edison, which, along with PG&E Corp.'s Pacific Gas & Electric, is on the verge of bankruptcy. They have accumulated $13 billion of debt for power costs that couldn't be passed on to consumers under the state's 1996 deregulation law.
Edison spokesman Kevin Kelley had no immediate comment. Jeff Blum, managing director at Credit Suisse First Boston, which arranged the bond sale, declined to comment.
NRG Energy Inc., a Minneapolis developer of power plants, sold $690 million worth of bonds Monday priced to yield 2.82 percentage points to 3.05 percentage points more than Treasury bills. That means it will pay about $20,000 less in annual borrowing costs per $1 million borrowed than Edison Mission.
Each company carries the same ratings at Moody's Investors Service and Standard & Poor's, the bottom rung of investment-grade ranks.
Edison Mission will use proceeds from the note sale for working capital and to pay off shorter-term debt, according to a recent Moody's report.
Edison International said in January that it was changing its corporate structure to protect Edison Mission from creditors.
Such "ring fencing" initiatives included the election of an independent director and the limiting of cash dividends paid to Edison International by the subsidiary.
Ratings companies have said a potential bankruptcy at Edison International wouldn't materially hurt Edison Mission's credit quality.
"Edison Mission Energy has satisfied the legal requirements for ring-fencing itself from its parent," said Terry Pratt, an analyst at S&P.
Moody's also noted that Edison International creditors would have limited motivation to try to consolidate Edison Mission's assets with those of its parent in the event of a bankruptcy.
That's because Edison Mission has a large amount of project financing on its books with project assets providing security to debt holders.
Ring fences and cash traps aside, however, Edison Mission Energy is not immune to what's going on in California.
The company has eight power generating operations that provide energy to affiliate Southern California Edison and to Pacific Gas & Electric. The two utilities temporarily suspended payment earlier this year to those facilities.
"I would be reluctant to do too much in the California utility market," said Richard Stevens, portfolio manager at Colonial Investment Services, who did not participate in the offering. "It's not a comfortable situation, at least until there is some sort of mechanism to recover power already purchased."
Bloomberg News and Dow Jones Newswires were used in compiling this report.