Fitch Expects to Rate $6.7B PG&E Secured Debt 'BBB'; Outlook Positive.
NEW YORK--(BUSINESS WIRE)--March 18, 2004
Fitch Ratings expects to assign a 'BBB' rating to Pacific Gas & Electric Company's (PG&E) proposed $6.7 billion issuance of secured bonds. The proceeds from the offering along with cash on hand are expected to be used to repay all of PG&E's outstanding pre-petition debt obligations. Fitch currently rates PG&E's senior secured and preferred securities 'BB-' and 'DDD', respectively, and plans to withdraw the ratings upon their redemption shortly after PG&E's reorganization and emergence from bankruptcy protection around mid-April 2004. PG&E is a subsidiary of PG&E Corporation (PCG). The Rating Outlook is Positive.
The new senior secured debt rating and Positive Rating Outlook reflect the reasonable capital structure at the time of reorganization and anticipated sharp improvement in PG&E's financial profile thereafter. The ratings also reflect the significantly improved legislative/regulatory environment that has evolved in California since 2002. In December 2003, the California Public Utilities Commission (CPUC) approved a settlement agreement that adopted a new plan of reorganization that superseded competing plans of reorganization then before the bankruptcy court. The new plan of reorganization, supported by the CPUC, PG&E and PG&E Corp. was confirmed by the bankruptcy court in December 2003 and will be subject to bankruptcy court jurisdiction for the nine-year duration of the plan. CPUC approval of the plan provides support for the restoration of an 'A-' rating over time, because the plan precludes the CPUC from adjusting the utility's authorized return on equity and capital structure targets until that rating level is achieved. In addition, the plan provides an $800 million rate reduction and environmental benefits for customers.
Key aspects of the settlement agreement are as follows:
-- PG&E and its parent will abandon efforts to disaggregate the
utility and agree to keep the utility vertically integrated
and subject to CPUC jurisdiction.
-- The settlement agreement reduces retail rates approximately
$800 million (retroactive to Jan. 1, 2004), resolves pending
filed rates doctrine litigation and establishes a $2.21
billion (after tax) regulatory asset to be recovered over
-- After emerging from bankruptcy, PG&E is to seek to refinance
up to $3 billion of the regulatory asset and the associated
taxes through a securitized dedicated rate component (DRC),
pending the enactment of supporting state legislation,
suitable to TURN, the CPUC and PG&E, authorizing the creation
of the DRC.
-- Any refunds or awards resulting from claims against power
suppliers will be used to reduce the $2.21 billion regulatory
-- PG&E will drop all litigation claims against the CPUC stemming
from the energy crisis.
-- The settlement is designed to produce an investment grade
credit profile and is contingent upon receipt of investment
grade credit ratings.
-- The authorized ROE will be 11.22% and the equity component of
capital will be 48.6%-52% in 2004 and 2005 and no lower than
52% thereafter until Moody's and S&P have established issuer
ratings equivalent to not less than 'A-'.
-- The CPUC will not adjust the company's return on equity and
equity component of capitalization until a rating equivalent
to 'A-' is assigned by one of S&P or Moody's.
-- Rates are no longer frozen and return to a cost of service
-- The settlement is enforceable by the bankruptcy court.
-- Generation rate bas is deemed to be just and reasonable.
Strong ring-fencing provisions included in the PG&E plan of reorganization and in CPUC regulations mandate a meaningful degree of separation between PG&E and its parent, PCG. However, PG&E is not totally isolated from potential credit and bankruptcy risk that, while not currently anticipated, could develop at its parent. Under PG&E's plan of reorganization, PG&E cannot pay dividends to its parent until mid-2004, at the earliest. However, Fitch believes that PG&E is unlikely to resume dividend payments until its equity ratio reaches 52%, which is estimated to occur in the second half of 2005.
Adequate liquidity exists at the parent-only level, with cash as of Dec. 31, 2003 approximating $1.04 billion. Parent debt of $880 million is scheduled to mature in 2008 ($600 million) and 2010 ($280 million). In a reasonable worst case scenario in which tax allocation issues require PCG to payout roughly $415 million, PCG's net cash would approximate $625 million. Under this scenario, PCG would have ample resources to meet its liquidity needs through 2005, when cash flows from utility dividends are expected to commence.
The terms of the new senior secured notes contain a fall-away provision that, in Fitch's opinion, could be triggered within two years. The bonds' first mortgage lien upon PG&E's property will be released when the utility's senior unsecured debt ratings from Standard & Poor's and Moody's are equal to or higher than the initial ratings on the senior secured bonds (i.e., BBB). Fitch expects PG&E to have robust cash flow from operations and that the utility's credit metrics will improve rapidly and remain strong for the duration of its nine-year regulatory settlement.
As a result, it is unlikely that the lien will remain in place for the long term. After the release, these bonds will be senior unsecured notes, subordinate to a limited amount of permitted secured claims against the utility. The amount of debt that can be issued subsequent to the proposed offering which could be senior to the debt upon release of the lien is limited by the indenture's negative pledge and, in Fitch's view, is not a significant concern.
The City of Palo Alto and two CPUC commissioners did not support the plan of reorganization and appealed the bankruptcy court's confirmation order in U.S. district court, following bankruptcy court's rejection of their motions for appeal and stay. In Fitch's view, appeals of the plan of reorganization have an extremely low probability of success.
For further information regarding the proposed orders before the CPUC, please refer to Fitch's Dec. 17, 2003 press release 'Fitch Comments on PG&E's Bankruptcy Compromise with TURN', available on the Fitch Ratings web site at 'www.fitchratings.com'.
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|Date:||Mar 18, 2004|
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