Fitch Upgrades PG&E's Unsecured Debt to 'BBB+'; Outlook Stable

Business Wire, Nov 16, 2004

NEW YORK -- Fitch Ratings has raised Pacific Gas & Electric Company's (PG&E) senior secured debt rating to 'BBB ' from 'BBB' and initiated a 'BBB ' rating on its $850 million secured credit facility. Fitch has also raised PG&E's indicative senior unsecured rating to 'BBB ' from 'BBB-'. The senior secured rating is restrained by covenants that provide for the release of collateral when PG&E's senior unsecured debt rating is changed by both of two other credit rating agencies to a level equal to the initial rating assigned to the restructured senior secured debt of PG&E by that agency. The Rating Outlook is Stable. All of PG&E's explicit debt currently is secured.

The ratings and Stable Rating Outlook reflect the utility's manageable post-bankruptcy restructuring debt load and relatively stable cash flow outlook and recent $600 million debt reduction at PG&E's corporate parent, PG&E Corporation (PCG). PCG's strategic focus is on its core utility business, rather than on diversified investments. Management plans to distribute excess free cash flows to shareholders, as an alternative to investments, setting a strategy that aims for growth from reinvestment in the utility. Fitch expects PG&E to generate significant free cash flow after expected utility investment.

The utility's bankruptcy settlement agreement, which was signed by the California Public Utilities Commission (CPUC) and approved by the U.S. Bankruptcy Court in December 2003, created a $2.2 billion after-tax regulatory asset that will be recovered from rate-payers over nine years starting in 2004. Legislation authorizing the securitization of PG&E's regulatory asset has been enacted, and the company is expected to refinance the regulatory asset early next year, pending final regulatory approval and an IRS ruling. Importantly, the bankruptcy settlement will remain subject to the jurisdiction of the bankruptcy court until December 2012 and provides for a minimum 11.22% return on equity and 52% equity ratio over the settlement period or until the company's issuer credit rating is raised to the equivalent of 'A-' by certain credit rating agencies.

PCG has severed its corporate and tax relationships with its former subsidiary National Energy & Gas Transmission (NEGT) through NEGT's bankruptcy reorganization effected on Oct. 29, 2004. In August 2004, PCG announced that it had finalized a tax agreement with NEGT's creditors eliminating PCG's potential liability to share tax benefits with NEGT's bankruptcy estate and releasing $350 million of restricted cash. Management used the released cash, along with a portion of its cash on hand, to redeem $600 million of parent-company debt. As a result, PCG's remaining parent-level debt is composed entirely of $280 million of convertible securities.

The terms of restructured PG&E senior secured debt (including the $850 million credit facility) contain a fall-away provision. The bonds' first mortgage lien on PG&E's property will be released when the utility's senior unsecured debt ratings from both of the two other credit rating agencies are equal to or higher than the initial ratings assigned to the senior secured bonds by that rating agency. If, and when, the lien is released, these bonds will become the utility's senior unsecured obligations, subordinate to a limited amount of permitted secured claims against the utility. The amount of prospective additional secured debt that can be issued subsequent to the release date and would be senior to the existing debt is limited by the indenture's negative pledge and, in Fitch's view, not a significant concern.