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Rating Action:

MOODY'S ASSIGNS PRIME-2 TO PACIFIC GAS & ELECTRIC COMPANY FOR COMMERCIAL PAPER PROGRAM; ASSIGNS Baa1 TO UNSECURED BANK CREDIT FACILITY; OUTLOOK STABLE

11 Jan 2006
MOODY'S ASSIGNS PRIME-2 TO PACIFIC GAS & ELECTRIC COMPANY FOR COMMERCIAL PAPER PROGRAM; ASSIGNS Baa1 TO UNSECURED BANK CREDIT FACILITY; OUTLOOK STABLE

Approximately $ 2.4 Billion of Debt Securities and Bank Credit Facilities Affected.

New York, January 11, 2006 -- Moody's Investors Service assigned a short term rating of Prime-2 to Pacific Gas and Electric Company (PG&E) in connection with the utility's new $1 billion Section 4(2) exempt commercial paper program. Moody's also assigned a rating of Baa1 to PG&E's $1.35 billion senior unsecured revolving credit facility that expires on April 8, 2010. The ratings on PG&E's other debt are unaffected, and the rating outlook remains stable.

The ratings and outlook recognize the expected stability of PG&E's cash flow and operating earnings over the next several years through the implementation of the settlement agreement that was approved by the California Public Utilities Commission (CPUC) and confirmed by the bankruptcy judge as part of the company's reorganization plan. The ratings also consider constructive actions taken by the CPUC and the legislature to help stabilize the electric power market in California. This supportive trend includes the May 2004 decision in PG&E's 2003 general rate case, which set revenue requirements for electric generation and electric and gas distribution through 2006, the December 2004 decision approving the California utilities long-term procurement plans, which among other things, extended the mechanism for the recovery of electric procurement costs, and the December 2005 cost of capital decision, which raised PG&E's ROE to 11.35% from 11.22%. The ratings also consider the issuance of $2.732 billion of Energy Recovery Bonds (ERBs) during 2005, the proceeds of which were used, along with refunds from wholesale generators, to complete the recovery of of PG&E's $3.7 billion pre-tax regulatory asset established by the settlement agreement.

For the twelve months ending September 30, 2005, the ratio of adjusted funds from operations (FFO) to total adjusted debt at PG&E approximated 25% and the utility's FFO coverage of adjusted interest expense was nearly 5x. While these financial metrics are strong for the Baa1 rating category, the rating also incorporates a number of unresolved state and federal regulatory issues; outstanding litigation, and the on-going challenge for PG&E to control its high electric rates in an environment of rising cost pressure, particularly for purchased power. Power costs could increase further if Calpine Corporation (Calpine), a wholesale generator which recently filed for bankruptcy, is successful in its bid to reject separate power purchase agreements with PG&E and with the California Department of Water Resources. If Calpine is successful in rejecting these contracts, PG&E would be required to procure replacement power at costs that are significantly higher than what is stipulated in current contract rates. Although there is a potential for strong customer opposition to rate increases, PG&E's credit quality and liquidity should be protected through the Energy Resource Recovery Account mechanism, which requires the CPUC to true-up a utility's revenues and expenses when the under-collection of current power and fuel procurement expenses totals more than 5% of the prior year's procurement expenses. In its December 2004 decision approving the utilities' long term procurement plans, the CPUC determined to extend this mandatory rate adjustment mechanism, which otherwise would have ceased on January 1, 2006, to the length of a resource commitment or 10 years, whichever is longer.

The Prime-2 rating assumes that the amount of commercial paper and other near term obligations outstanding will be managed within the limits of PG&E's readily available sources of cash, including its committed bank credit facility. At September 30, 2005, PG&E had $854 million of unrestricted cash. However, Moody's expects that unrestricted cash balances will be substantially less during 2006. PG&E's alternate liquidity sources include the $1.35 billion unsecured revolving credit facility, rated Baa1, which matures in April 2010. Of the $1.35 billion in available commitments, $950 million can be used to issue letters of credit for power procurement. New borrowings under the revolver do not require a representation that there has been no material adverse change in the condition of PG&E. Financial covenants include the maintenance of a 65% debt-to-capital ratio. PG&E was comfortably within compliance of this test as of the most recent statement date. In addition to the $1.35 billion unsecured revolver, PG&E has access to a $650 million accounts receivable financing facility that expires on March 5, 2007.

The stable rating outlook for PG&E reflects the predictability of cash flow due to the strength of the settlement agreement, reinforced by recent decisions from the CPUC, along with the company's lower risk back-to-basics business strategy. The stable outlook also considers the company's plans to largely finance its sizeable capital spending with internally generated funds, while maintaining a common equity ratio at the utility of at least 52%.

PG&E's long-term ratings could be upgraded if major litigation matters are settled in a way that is not detrimental to credit quality, if the supportive regulatory trend continues, including a clear reaffirmation that the CPUC would allow timely recovery of power procurement costs should Calpine succeed in rejecting its contract with PG&E and with CDWR, and if there is greater clarity on the future structure of the market, including whether utilities or generators will own and operate new in-state generation and the manner in which competition may be reintroduced. Assuming that the regulatory environment continues to be fairly supportive for the duration of the period of markedly elevated natural gas prices, a downgrade is unlikely given the strong financial metrics for the company in its rating category.

Headquartered in San Francisco, California, PG&E is a vertically integrated utility and a wholly-owned subsidiary of PCG.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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