EDITORS: Please do not use
"Pacific Gas and Electric" or "PG&E" when
referring to PG&E Corporation or its National Energy Group.
The PG&E National Energy Group is not the same company as Pacific
Gas and Electric Company, the utility, and is not regulated by the
California Public Utilities Commission. Customers of Pacific Gas
and Electric Company do not have to buy products or services from
the National Energy Group in order to continue to receive quality
regulated services from Pacific Gas and Electric Company.
UPDATE: PG&E SAYS FATAL FLAWS IN CPUC'S TERM SHEET SHOWS IT IS NOT
CREDIBLE AND WILL NOT WORK
Court Filing Shows CPUC's
Term Sheet Falls Short by More Than $4.5 Billion Dollars; Will Not
Make Utility Investment Grade and Keeps State in the Power Buying
San Francisco - PG&E Corporation
(NYSE: PCG) and Pacific Gas and Electric Company today jointly filed
their response to the California Public Utilities Commission's (CPUC)
term sheet for a proposed plan of reorganization.
"The term sheet's $4.5 billion
shortfall is fatal to the CPUC's overall proposal," PG&E said in
it is filing. "The Court need go no further than this critical threshold
fact to conclude that the plan described in the term sheet is patently
defective and unconfirmable.
"The CPUC's contemplated
plan endangers PG&E's ability to meet its obligation to serve by
limiting its capital expenditures and fails to restore PG&E to a
financial position that will allow it to effectively resume power
The CPUC's Proposal Does
Not Work - It is Short by More Than $4.5 Billion
Available cash must be
decreased by more than $2.0 billion
In the term sheet, the
CPUC overstates PG&E's available cash because it did not account
for the $650 million the company paid in December 2001
for income and property taxes.
The term sheet also
forecasts approximately $1.75 billion in residual generation
revenues ("headroom") between December 1, 2001 and January 31,
2003. The CPUC failed to reflect the federal and state income
taxes the utility would be required to pay on that income -
approximately $710 million.
The CPUC fails to provide
$500 million in funding for needed infrastructure improvements
and enhancements to allow the utility to fulfill its functions.
The $500 million represents 1/3 of the utility's 2002 capital
expenditures. These funds are earmarked for critical infrastructure
projects such as replacing gas pipelines, upgrading transmission
lines for Path 15 and the Tri-Valley and San Jose areas, and
undergrounding the electric system.
The term sheet understates
interest payments on mortgage bonds and other obligations by
approximately $220 million.
must be increased by at least $2.5 billion
The term sheet understates
the amount paid to creditors that have general unsecured claims
(Class 5) by $1.06 billion. The CPUC attempted to reclassify
the $1.06 billion owed to qualifying facilities from general
unsecured claims into administrative expense claims. However,
PG&E's plan of reorganization already accounted for this, so
the CPUC's term sheet does not accurately reflect the amount
owed to general unsecured claimants. Because the term sheet
requires general unsecured claimants to be paid in cash, the
CPUC would need an additional $1.06 billion.
The term sheet calls
for approximately $5.8 billion of debt to be reinstated. However,
about $940 million of that debt cannot be reinstated.
At least $333 million
in Secured First Mortgage Bonds matures on March 1, 2002,
and the CPUC's contemplated plan would not become effective
by this date.
The $610 million in
Letter of Credit Backed PC Bond Claims and Letter of Credit
Bank Claims are not reinstatable because the Letter of Credit
Banks cannot be forced to renew or extend these letters of
credit (all of which expire in 2002 or 2003).
The term sheet attempts
to take the $500 million in estimated Federal Energy Regulatory
Commission (FERC) refunds and other adjustments away from paying
creditors and places the money into a litigation trust. In PG&E's
plan the money is used to offset generator and energy service
provider claims. As a result, the CPUC would need an additional
$500 million to pay these creditors.
The Term Sheet Will
Not Restore the Utility to Investment Grade and Thus Keeps the State
in the Power Buying Business
The CPUC's contemplated
plan would not allow PG&E to return to investment grade status.
The financial markets and rating agencies currently have no
basis to believe that the CPUC will implement structural regulatory
reforms to restore the utility's financial health.
Standard & Poor's recently
stated, "although the [CPUC's] reorganization plan purports
to address [PG&E's] defaulted obligations, it is silent on whether
PG&E will exhibit long-term financial performance consistent
with investment grade ratings. Therefore, under the CPUC proposal,
it remains unclear whether and when PG&E's ratings will be restored
to investment grade."
Since the CPUC's term
sheet would not restore PG&E to investment grade status, the
utility could not enter into long-term contracts for gas and
electricity and would only be able to purchase on the volatile
"spot market," if it had the resources to post adequate collateral.
Customers would be directly exposed to monthly price volatility.
As a result, the State of California would have to remain in
the power procurement business for several more years.
Other Problems with
the CPUC's Term Sheet
Financing a $4.5 billion
shortfall is not feasible under the CPUC's existing regulatory
framework, which the term sheet assumes will continue.
The term sheet would
require significant spending reductions or force PG&E to borrow
money with no clear means of repaying it. The CPUC proposes
that PG&E secure credit to fund capital expenditures and working
capital. However, based on the lack of assurance regarding PG&E's
investment grade status, such a credit facility would almost
certainly not be available to the utility.
The CPUC's term sheet
seeks to take at least $1.2 billion of the utility's authorized
return on investment and use the money to pay the creditors.
The proposal is unlawful and would require the Bankruptcy Court
to preempt the CPUC's own decisions, federal and state laws,
and the U.S. and California Constitutions.
The CPUC's term sheet
will impair the rights of a significant amount of creditors
and equity holders, which could lead those who are disadvantaged
to pursue protracted litigation that could delay the resolution
of the case.