Fitch Initiates PG&E Indicative Unsecured Rating of 'BBB-'; Otlk Pos

Business Wire, Nov 8, 2004

NEW YORK -- Fitch Ratings has initiated an indicative rating for senior unsecured obligations of Pacific Gas & Electric Company (PG&E) of 'BBB-' and affirmed PG&E's secured bond rating of 'BBB'. The Rating Outlook is Positive. The indicative senior unsecured obligation rating applies to the unsecured claims of counterparties and trade creditors, for example. All of PG&E's explicit debt currently is secured.

The ratings and Positive Rating Outlook reflect the utility's manageable postbankruptcy restructuring debt load and relatively stable cash flow outlook. The Positive Outlook anticipates imminent reduction in debt leverage at PG&E's corporate parent, PG&E Corp (PCG). PCG management's strategic focus is on its core utility business, rather than on diversified investments. Although PCG management plans to distribute excess free cash flows to shareholders, as an alternative to investments, management has set 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 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 company credit is rated at least 'A-' by S&P or 'A3' by Moody's.

PCG has severed its corporate and tax relationships with its former subsidiary National Energy & Gas Transmission (NEGT) through a bankruptcy reorganization effected on Oct. 29, 2004. In October 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 plans to use the released cash, along with a portion of its cash on hand, to redeem $600 million of parent-company debt. After the debt repayment, PCG's remaining parent-level debt would be composed entirely of $280 million of convertible securities.