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14 Sep 2000
MOODY'S CHANGES THE RATING OUTLOOK FOR PACIFIC GAS AND ELECTRIC COMPANY AND FOR PG&E CORPORATION TO NEGATIVE FROM STABLE; ALSO PLACES PG&E CORPORATION'S PRIME-1 SHORT-TERM RATING UNDER REVIEW FOR POSSIBLE DOWNGRADE
New York, September 14, 2000 -- Moody's Investors Service has changed the rating outlook on the securities
of Pacific Gas and Electric Company (Senior Secured Debt at A1) to negative
from stable and has changed the rating outlook on PG&E Corporation
(PG&E Corp: Issuer Rating at A3) to negative from stable.
Additionally, Moody's has placed the short-term rating of
Prime-1 for PG&E Corp's commercial paper and extendible commercial
notes under review for possible downgrade.
The outlook change reflects the increased supply risk being assumed by
Pacific Gas and Electric Company due to the unprecedented spike in electric
prices during the past three months as well as the unsettled state of
electric deregulation in California.
During the past three months, electric prices have escalated to
unparalleled levels due in large part to a shortage in regional electric
supply caused by higher demand, warmer weather, and the lack
of new large capacity additions in California and in the west.
Under AB1890, which deregulated the electric utility industry in
California, Pacific Gas and Electric Company is required to sell
all of its output, including resources available from QF contracts,
into the California Power Exchange (CalPX: Short Term Issuer Rating
- Prime-1) and must purchase all of its supply needs from
the CalPX. Additionally, AB1890 requires Pacific Gas and
Electric Company to sell or market value their non-nuclear generating
assets. Pacific Gas and Electric Company has sold almost all of
its in-state fossil-fueled generation and has reached a
settlement to transfer its hydro assets to an affiliated company.
Importantly, AB1890 caps Pacific Gas and Electric Company's retail
rates through a rate freeze that expires on or before March 31,
2002. In light of the rate cap that exists, Pacific Gas and
Electric Company finds itself paying substantially more for electric supply,
to meet its net purchases, relative to what it receives from its
customers under their tariffs. Net purchases on average represent
approximately 40% of Pacific Gas and Electric Company's supply
Pacific Gas and Electric Company is recording these power costs in a separate
balancing account that is funded by short-term debt. The
level of short-term debt is expected to increase over the next
two years, particularly if power prices remain near the levels experienced
this past summer. Through 06/30/2000, Pacific Gas and Electric
Company has not incurred the bulk of the power costs expenditures due
to the timing of when their bills from the CalPX are due. However,
debt levels are expected to increase materially during the fourth quarter
2000, as Pacific Gas and Electric Company funds these obligations,
and debt levels are expected to remain elevated for the next several years.
Under AB 1890, amounts that are not recovered under this balancing
account by March 31, 2002 are subject to a potential write-off.
Additionally, Pacific Gas and Electric Company's request with California
Public Utilities Commission (CPUC) to secure a recovery mechanism for
this type of balancing account was denied in 1999. Pacific Gas
and Electric Company has appealed the CPUC decision.
The outlook change also reflects the unsettled state of deregulation in
California. Within the past month, the CPUC and the legislature
have issued decisions, which are inconsistent with the current timeframe
outlined under AB 1890. For one, both the CPUC and the legislature
have approved measures that would cap energy rates for customers of San
Diego Gas and Electric (SDG&E) for possibly two years beyond the end
of the transition period for Pacific Gas and Electric Company's customers
under AB1890. Although the CPUC's and the legislature's actions
centered around SDG&E, Moody's anticipates that the CPUC and
legislature could adopt a similar approach for Pacific Gas and Electric
Company's customers since sufficient capacity additions are not expected
to come on-line until after the summer of 2002. In Moody's
opinion, the supply-demand imbalance throughout the west
is the single largest contributor to the increase in wholesale electric
prices this summer. Along the same lines, uncertainty exists
regarding the future deregulated marketplace in California, including
among other things, the future role of the California PX and the
California Independent System Operator (Senior Unsecured Debt at A2).
Resolution of these collective issues are likely to take at least two
years which serves to add uncertainty to the credit quality of both Pacific
Gas and Electric Company and its parent, PG&E Corp.
Pacific Gas and Electric Company's ability to mitigate its exposure to
the current high prices may be somewhat limited. For one,
prices in the California PX are also being affected by the increased price
of natural gas in California. Additionally, the utility's
ability to influence the speed at which new generating projects come on-line
is also constrained. Moreover, the price of electricity is
beginning to show signs of being somewhat inelastic to changes in market
conditions in California causing prices to remain high. The CPUC
and the Federal Energy Regulatory Commission has begun to investigate
the California wholesale market, but it is too early to predict
the outcome of their investigations. Although Pacific Gas and Electric
Company now has the ability to enter into bilateral agreements,
which should help to mitigate this supply risk, the contract price
may end up being high relative to their tariff under the rate freeze,
particularly given the need for additional capacity in the region.
Moody's decision to place the commercial paper and the extendible commercial
notes of PG&E Corp under review for possible downgrade reflects the
outlook change for both Pacific Gas and Electric Company and PG&E
Corp and the expectation that Pacific Gas and Electric Company will be
carrying materially higher levels of short-term debt for at least
two years with some uncertainty about the mechanism and the timeframe
for recovery. Additionally, the amount of incremental short-term
debt remains somewhat unknown as it is dependent upon energy prices in
the west. However, Moody's believes that the amount of incremental
debt could be material particularly to meet the energy needs during the
summer of 2001, which could weaken debt service measures for both
Pacific Gas and Electric Company and PG&E Corp and impact financial
Headquartered in San Francisco, California, PG&E Corp
is an energy services company and the parent holding company of Pacific
Gas and Electric Company, an operating public utility engaged principally
in the business of providing electricity and natural gas distribution
and transmission services throughout most of Northern and Central California.
Susan D. Abbott
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
VP - Senior Credit Officer
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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