Moody’s reviewing Pacific Gas and Electric Co. for possible upgrade

New York, June 24, 2003 — Moody’s Investors Service placed the ratings of Pacific Gas and Electric Company, including its senior unsecured debt at Caa2, under review for possible upgrade following the announcement of a proposed settlement agreement between Pacific Gas and Electric Co., its parent PG&E Corporation, and the staff of the California Pubic Utilities Commission (CPUC).

If this agreement is approved and adopted, it could allow the utility to exit bankruptcy by early 2004, avoiding long and protracted litigation between the utility and the CPUC.

Under the terms of the tentative agreement, the utility would pledge not to disaggregate the utility business as had been contemplated in its plan. Instead, the utility would remain vertically integrated under CPUC jurisdiction.

The CPUC would acknowledge that it is fair and in the public interest for Pacific Gas and Electric Company to recover prior uncollected costs and to provide the utility’s shareholders with an opportunity to earn a reasonable rate of return on the utility business.

Key elements of the plan include the creation of $2.2 billion regulatory asset as an additional part of the utility rate base recovered pursuant to a target return on equity of 11.22% over a nine-year period. Rates would be reduced by about $350 million beginning in January 2004 under the settlement, with future rate reductions thereafter.

The CPUC would agree that the “headroom” revenue collected by the utility through December 31, 2003 would be the property of the bankruptcy estate, available to pay claims in the bankruptcy case. Creditors would receive 100% of their valid claims, with the maturity of the claims being satisfied with cash. Pacific Gas and Electric Company would dismiss litigation it had filed against the CPUC, including litigation under the filed rate doctrine.

The settlement requires numerous approvals including by the CPUC, the company’s Board of Directors, and the Bankruptcy Court. Moody’s expects that numerous consumer groups will oppose the settlement and the Governor has already publicly stated his opposition to the plan. As such, approval by the CPUC is not assured.

The rating review will assess the prospects for the settlement being adopted along with the financial implications of the settlement to Pacific Gas and Electric Company’s future earnings and cash flow profile. Moody’s notes that it is possible that the ratings of the utility could be upgraded before resolution of the bankruptcy since the all plans of reorganization, including the current one, contemplate 100% recovery rates for all valid creditor claims filed in the estate.

Ratings under review for possible upgrade include:

– the B3 rated first mortgage bonds and the secured pollution control bonds of Pacific Gas and Electric Company;

– the Caa2 issuer rating, senior unsecured notes, unsecured debentures, and unsecured, unenhanced pollution control bonds of Pacific Gas and Electric Company;

– the Caa3 preferred stock of PG&E Capital I;

– the Ca preferred stock of Pacific Gas and Electric Company;

Headquartered in San Francisco, California, Pacific Gas and Electric Company is 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. PG&E Corporation is the parent holding company of Pacific Gas and Electric Company.

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