Chapter 11 Update: PG&E Says Fatal Flaws In Cpuc's Term Sheet Shows It Is Not Credible And Will Not Work


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 procurement."

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.

Cash obligations 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 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.

  • 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.

FactSheet Attached (PDF, 62KB)


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