Fitch Ratings Upgrades PG&E; Remains On Rating Watch Positive.

Business Editors

NEW YORK--(BUSINESS WIRE)--July 1, 2003

Fitch has raised the ratings of Pacific Gas and Electric Company's (PG&E) senior secured debt and preferred stock to 'BB-' and 'DDD', respectively, from 'DDD' and 'D'. PG&E's secured debt and preferred stock remains on Rating Watch Positive by Fitch.

The ratings reflect the fact that PG&E, a debtor-in-possession company since it filed for bankruptcy protection in April 2001, is currently paying all interest payments on its outstanding debt securities and Fitch's view that the utility is likely to continue to do so through the remainder of the bankruptcy process. In addition, while the bankruptcy court has not permitted principal repayments on unsecured debt obligations as they matured since the commencement of the bankruptcy proceedings, authority was given for principal repayment of a secured debt obligation that came due last year. Consequently, the ratings assume that the bankruptcy court will approve PG&E's pending motion to authorize payment of approximately $281 million of maturing mortgage bond principal on Aug. 1, 2003 and that similar authority would be granted to repay $310 million of maturing secured bonds in 2004 and $289 million in 2005, if necessary.

Dividend payments on preferred stock have also been interrupted during the bankruptcy. These payments are, however, cumulative, and the arrears must be cleared before PG&E can resume common dividend payments following emergence from bankruptcy. It is noteworthy that all plans of reorganization submitted to-date have contemplated full recovery of all valid obligations with interest. It is also contemplated that the preferred dividend arrearages would be cleared together with other obligations, upon emergence from bankruptcy. This, combined with constructive regulatory developments in California and energy market fundamentals, suggests a high probability that full recovery will be realized by investors. As a consequence, the rating of the secured debt obligations has been raised to 'BB-', in line with Fitch's policy on rating performing pre-petition debt obligations of companies in bankruptcy, while the rating of the preferred stock has been raised to 'DDD', signifying an ultimate recovery expectation of between 90%-100% of outstanding amounts.

Separately, the listing of PG&E's secured debt and preferred stock on Rating Watch Positive considers the favorable rating implications of the recently announced proposed bankruptcy settlement reached by the California Public Utilities Commission (CPUC) Staff, PG&E and PG&E Corp. The settlement agreement is the basis for the company's new disclosure statement and plan of reorganization, which were filed by PG&E on June 27, 2003, with the Official Creditors Committee (OCC) as co-proponent. The CPUC and the bankruptcy court are expected to issue a ruling regarding the proposed bankruptcy settlement agreement and new plan of reorganization, respectively, by year-end 2003. Timely approval of the proposed settlement agreement and the new plan of reorganization would likely result in positive resolution of the Rating Watch status.

On June 19, 2003, PG&E announced a proposed settlement with the CPUC Staff regarding their competing plans of reorganization. The proposed settlement agreement is subject to approval of the Boards of Directors of Pacific Gas and Electric and its corporate parent, PG&E Corp., the CPUC, and the bankruptcy court. Under the terms of the agreement, PG&E and its parent will abandon efforts to disaggregate the utility and submit a revised plan of reorganization that will keep the utility vertically integrated and subject to the jurisdiction of the CPUC and other regulatory agencies. The proposed settlement agreement resolves pending filed rate doctrine litigation, among other proceedings, and establishes a $2.21 billion regulatory asset to be recovered over nine years. Any refunds from or claim offsets against power suppliers will be used to reduce the $2.21 billion regulatory asset. Also, under the terms of the agreement, the CPUC is expected to reduce retail rates approximately $350 million per year beginning Jan. 1, 2004.

PG&E filed a new disclosure statement and plan of reorganization (POR) on Friday, June 27, 2003 that reflects the terms of the proposed settlement agreement. The approval process for the POR, including a creditor vote, and the proposed settlement will proceed along parallel paths before the bankruptcy court and the CPUC, respectively. The CPUC is expected to issue a ruling and the plan could be confirmed by the bankruptcy court by year-end 2003. Based on Fitch's analysis, the company's cash flow and earnings coverage and leverage ratios would improve dramatically with adoption of the plan and the company's emergence from bankruptcy in 2004. Importantly, the settlement would align the interests of, and defuse a bitter disagreement between, the management of the state's largest utility and the CPUC.