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Rating Action:

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

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.

BACKGROUND

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 requirements.

RATIONALE

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 flexibility.

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.

New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

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

No Related Data.
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