Moody’s upgrades PG&E Co.; rating outlook positive

New York, Oct. 23, 2003 — Moody’s Investors Service upgraded the debt ratings of Pacific Gas and Electric Co. (Senior Unsecured Debt to B2 from Caa2). The rating action concludes a review for possible upgrade that was initiated on June 23, 2003. The rating outlook is positive.

Rating upgraded include:

– First mortgage bonds and the secured pollution control bonds of Pacific Gas and Electric Company to Ba3 from B3;

– Issuer rating, senior unsecured notes, unsecured debentures, and unsecured, unenhanced pollution control bonds of Pacific Gas and Electric Company to B2 from Caa2;

– Subordinated debt of Pacific Gas and Electric Company to B3 from Caa3;

– Preferred stock of Pacific Gas and Electric Company to Caa1 from Ca;

The rating action reflects significant progress towards resolving regulatory issues with the California Public Utilities Commission (CPUC), apparent progress towards agreement on a Plan of Reorganization (POR), and Moody’s belief that the company’s emergence from bankruptcy is likely to occur sometime during 2004.

The ratings also consider that Pacific Gas and Electric Company, while operating in bankruptcy since April 2001, is current on interest payments on all of its debt obligations, and is expected to remain current through the remainder of the bankruptcy proceeding.

Based on recent SEC and bankruptcy court filings by Pacific Gas and Electric Company, cash on hand, including restricted cash, at August 31, 2003 was in excess of $4 billion. Cash available to pay creditor claims is expected to be around $2.5 billion at year-end 2003.

Moreover, cash from operations is expected to remain robust enough to satisfy ongoing operating and financial obligations without materially depleting the $2.5 billion in cash balances needed to satisfy creditor claims upon exiting from bankruptcy.

Pacific Gas and Electric Company has met all of its payment obligations under its first mortgage bond indenture on a timely basis, including the payment of $333 million of principal due in March 2002 and the payment of $281 million of principal due in August 2003. In both instances, the utility sought and obtained bankruptcy court approval for such principal repayment.

Pacific Gas and Electric Company has $310 million due in March 2004 and Moody’s expects the company to have the internal funds to repay these obligations on the due date upon receipt of approval from the bankruptcy court. In the half of 2002, Pacific Gas and Electric Company began making payments of pre-petition and post petition interest to all holders of unsecured indebtedness, except those classes with disputed claims, which includes the generators and the energy service providers.

These payments remain current, including interest payments to the holders of subordinated debt obligations. Interest payments on senior unsecured and subordinated debt obligations are expected to continue through the remaining term of the bankruptcy.

Moody’s rating action also considers that under the current POR as well as under previous PORs proposed by the company and by the CPUC, all classes of bondholders and preferred equity holders would receive full repayment of their obligations either through cash repayment of the obligations due or through the reinstatement of the obligation.

In the current POR, the vast majority of the company’s securities will be repaid from the cash on hand or from the proceeds of new securities issued at the time that the utility emerges from bankruptcy.

The positive rating outlook reflects the proposed settlement agreement between Pacific Gas and Electric Company, its parent PG&E Corporation, and the staff of the CPUC. Under the terms of the settlement agreement, a $2.2 billion regulatory asset would be created as an additional part of the utility rate base and would be recovered pursuant to a target return on equity of 11.22% over a nine-year period.

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. 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 the CPUC, the company’s Board of Directors, and the bankruptcy court.

Key decisions from the bankruptcy court and from the CPUC are expected before year-end 2003. These decisions and resolution of various remaining legal and regulatory issues could pave the way for the utility to emerge from bankruptcy as early as the first quarter of 2004. Under the current POR, an investment grade rating from Moody’s is one of the conditions for the company to exit from bankruptcy.

The current ratings are significantly below investment grade and reflect, among other things, the uncertain financial profile of the company at the time of its emergence from bankruptcy and the fact that various legal and regulatory uncertainties remain concerning the company’s exit from bankruptcy. It is possible that the regulatory plan contemplated under the current POR might not be approved by the CPUC and the bankruptcy court, causing the company to emerge from bankruptcy under a modified POR, or causing the company to remain in bankruptcy for an indeterminate time period while a new POR is formulated.

Headquartered in San Francisco, California, Pacific Gas and Electric Company is an operating public utility, that is 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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