SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 17, 2001
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
---------- -------------- --------------- --------------
1-12609 PG&E Corporation California 94-3234914
1-2348 Pacific Gas and California 94-0742640
Electric Company
Pacific Gas and Electric Company PG&E Corporation
77 Beale Street, P.O. Box 770000 One Market, Spear Tower, Suite 2400
San Francisco, California 94177 San Francisco, California 94105
(Address of principal executive offices) (Zip Code)
Pacific Gas and Electric Company PG&E Corporation
(415) 973-7000 (415) 267-7000
(Registrant's telephone number, including area code)
Item 5. Other Events.
A. Ratings Downgrades
On January 16, 2001, Standard & Poor's (S&P) rating agency reduced the
long-term corporate credit ratings of PG&E Corporation and its
California subsidiary, Pacific Gas and Electric Company (Utility), to CC
from BBB-. S&P stated that the downgrades reflect the heightened
probability of the Utility's imminent insolvency and the resulting
negative financial implications for affiliated companies because, among
other reasons, (1) some of the Utility's principal trade creditors are
demanding that sizeable cash payments be made as a pre-condition to the
purchase of natural gas and electric power necessary for on going
business operations; (2) neither legislative nor negotiated solutions to
the California utilities' financial meltdown appear to be forthcoming in
a timely manner, which continues to impede access to financial markets
for the working capital needed to avoid insolvency; and (3) Southern
California Edison's (SCE) decision to default on its obligation to pay
principal and interest due on January 16, 2001 diminishes the prospects
for the Utility's access to capital markets.
The current S&P credit ratings, compared to the prior ratings, are as
follows:
PG&E Corporation:
Corporate credit rating: CC/C from BBB-/A-3
Commercial paper: C from A-3
Pacific Gas and Electric Company
Corporate credit rating: CC/C from BBB-/A-3
Commercial paper: C from A-3
Senior secured debt: CCC from BBB
Senior unsecured debt: CC from BBB-
Preferred stock: D from BB
Shelf senior secured/unsecured: CCC/CC from BBB/A-3
Shelf debt preferred stock (preliminary): D from BB
PG&E Capital I, II, III, IV
Corporate credit rating: CC from BB
Preferred Stock: C from BB
Each of the above ratings is listed on S&P's CreditWatch with negative
implications, reflecting expectations that the ratings will be further
downgraded as the Utility's financial condition deteriorates.
S&P stated that "[a]lthough there is still a possibility that federal or
state officials will act to rehabilitate the state's utilities'
financial health, such prospects appear increasingly remote." S&P
further noted that the Utility's "risk of insolvency is directly related
to the mechanisms underlying California's restructuring of its electric
industry. The legislative and regulatory framework for that
restructuring led to sizable imbalances between Pacific Gas and Electric
Company's operating expenses and revenues. An immediate plan that
provides sufficient confidence to the capital markets that lenders will
be repaid for existing and future debt obligations remains the only way
to restore the state's utilities to a sound financial footing."
On January 17, 2001, Moody's Investor Service, Inc. (Moody's) reduced
the Utility's senior unsecured debt rating to Caa2 from Baa3 and reduced
its short term rating for commercial paper and extendible commercial
notes to Not Prime from Prime-3. Moody's also reduced PG&E
Corporation's issuer rating to Caa3 from Baa3 and its short term
commercial paper rating to Not Prime from Prime-3.
Ratings downgraded by Moody's and under review for possible downgrade
include the Utility's first mortgage bonds and secured pollution control
bonds, lowered to B3 from Baa2; the issuer rating, the senior unsecured
notes, the unsecured debentures, and the unsecured pollution control
bonds of the Utility, lowered to Caa2 from Baa3; the preferred stock of
PG&E Capital I, lowered to "caa" from "ba1"; and a shelf registration
for the Utility's issuance of senior secured debt and senior unsecured
debt lowered to (P)B3 and (P)Caa2, from (P)Baa2, (P)Baa3, and (P)"ba1",
respectively. The Utility's preferred stock and a shelf registration
for preferred stock rated "caa" and (P)"caa", respectively, remain under
review by Moody's for possible downgrade.
In its press release announcing its actions, Moody's stated:
While Pacific Gas and Electric's fragile liquidity position
increases the specter of a bankruptcy filing, Moody's
maintains its view that the key constituencies, including
the Governor and the legislature, would not find an Pacific
Gas and Electric bankruptcy a reasonable alternative. For
one, a Pacific Gas and Electric bankruptcy would reduce the
role of the Governor, the legislature, and the CPUC as many
substantive actions would be under the direction of the
bankruptcy court. Second, a Pacific Gas and Electric
Company bankruptcy would do little to fix the underlying
problem, which in Moody's opinion, relates to a
dysfunctional market and a supply/demand imbalance. If
anything, a bankruptcy of Pacific Gas and Electric Company
would greatly complicate the state's power problems. Third,
a utility bankruptcy would likely cause customer's rates to
increase above the current level and would raise
reliability issues for the state making rolling brownouts a
common occurrence for some period of time. Notwithstanding
these very compelling reasons, key constituencies, to date,
continue to respond cautiously and even skeptically to
Pacific Gas and Electric Company's financial woes.
Unfortunately, given the company's very tight liquidity
position, time is running out which hastens the need for a
prompt and supportive response by all parties involved in
the process, if a bankruptcy of Pacific Gas and Electric
Company and PG&E Corporation is to be avoided.
S&P's minimum investment grade rating is BBB-. Moody's minimum
investment grade rating is Baa3. Thus, the ratings downgrade by both
S&P and Moody's result in below minimum investment grade ratings for
PG&E Corporation and the Utility.
B. Liquidity Impacts and Financial Condition
For liquidity purposes, the Utility maintains two credit facilities; a
five year $1 billion facility and a $850 million 364-day facility. The
downgrade of the Utility's ratings below investment grade constitutes an
event of default under the Utility's $850 million revolving credit
facility. Although there are currently no borrowings under the
agreement, such a default would entitle the lenders to accelerate any
debt outstanding under this facility. The existence of a default also
entitles the banks to refuse a loan request under this facility
(including draws to repay commercial paper backed by this facility).
The Utility's $850 million facility is fully utilized as back-up for the
Utility's outstanding commercial paper. The Utility has $873 million of
commercial paper outstanding, of which $437 million will mature by
January 31, 2001. As the Utility's commercial paper matures, the
Utility has been drawing on its $1 billion facility to pay the
commercial paper. As of January 16, 2001, the Utility has draw down
$938 million under this facility. Although the Utility's $1 billion
facility does not provide that a ratings downgrade below investment
grade is an event of default, the banks nevertheless refused a borrowing
request on January 16, 2001. On January 17, 2001, $33 million of the
Utility's commercial paper came due and the Utility failed to pay the
maturing debt.
The Utility has current cash reserves of $700 million. As previously
disclosed, the Utility has payments due to the California Independent
System Operator (ISO) on February 1, 2001 for real-time energy purchases
of $583 million. In addition, the Utility estimates that its payment to
the California Power Exchange (PX), due on February 15, 2001 for day-
ahead energy purchases through January 15, 2001, will be in excess of
$100 million. On January 16, 2001, the PX notified the Utility that the
ratings downgrade requires the Utility to post collateral for all
transactions in the PX day-ahead market. Since the Utility is unable to
post such collateral, the PX will suspend the Utility's trading
privileges effective January 19, 2001 in the day-ahead market.
Therefore the PX payment estimate has been substantially reduced from an
earlier disclosed estimate of $431 million.
The payments due to the ISO and the PX are based on market price
assumptions that are subject to change until the Utility receives the
bill from the ISO and PX. These estimates are net of the Utility's
expected generation revenues from deliveries of the Utility's generation
to the ISO and the PX.
The Utility also has payments of $420 million due to qualifying
generators (QFs) in early February 2001 and estimated payments of $410
million due to QFs in early March 2001. The Utility is currently
negotiating an agreement with a group of QFs requesting that they
forbear from demanding payment for power delivered through January 2001
until March 31, 2001 with payment due in full on April 1, 2001. The
agreement is subject to a number of conditions, including legislative
and regulatory actions. There is no assurance that such conditions will
be met. As previously disclosed, the Utility estimates that its payment
to the ISO for energy purchases in December 2000, which is due on March
2, 2001, will be $1.2 billion. Further, the Utility's average monthly
gas procurement disbursements are approximately $300 million, based on
normal trade terms.
PG&E Corporation has current cash reserves of $347 million. The
downgrade of PG&E Corporation's ratings below investment grade
constitutes an event of default under PG&E Corporation's $436 million
short-term and $500 million long-term revolving credit facilities,
entitling the lenders to accelerate approximately $434 million of debt
outstanding under the $500 million facility. There are no borrowings
under the $436 million facility, although the facility is fully utilized
to back up PG&E Corporation commercial paper program. The existence of
a default also entitles the banks to refuse a loan request under the
facilities (including further draws to repay maturing commercial paper).
PG&E Corporation has $501 million of commercial paper outstanding, of
which $263 million will mature by January 31, 2001. On January 16,
2001, the banks refused a borrowing request under the $500 million PG&E
Corporation credit facility. On January 17, 2001, $43 million of PG&E
Corporation's commercial paper came due and PG&E Corporation failed to
pay the maturing debt.
In addition, PG&E Corporation is the guarantor of obligations of its
energy trading subsidiaries, PG&E Energy Trading-Power, L.P., PG&E
Energy Trading-Gas Corporation, and PG&E Energy Trading-Canada
Corporation, in the aggregate amount of up to $ 1.9 billion. Under many
of the underlying trading agreements, the downgrade of PG&E
Corporation's long-term debt below investment grade would entitle the
counterparties to demand substitute credit support from the energy
trading subsidiaries. PG&E Corporation is in the process of replacing
these guarantees with guarantees from an alternate investment-grade
subsidiary of PG&E National Energy Group, Inc., but to the extent this
process is not complete, certain of the counterparties may have the
right to demand substitute credit support, and if the support is not
provided, declare a default, terminate the agreement, and make a claim
under the parent guarantee. If claims are made under a substantial
portion of the outstanding guarantees, PG&E Corporation may be unable to
timely honor the guarantees.
In addition, the downgrade of PG&E Corporation's long-term debt (or its
implied rating) below investment grade by S&P and/or Moody's, and the
failure by PG&E Corporation to provide an acceptable letter of credit in
the required amounts within the required time periods, would trigger
PG&E Corporation's infusion obligations under various capital infusion
agreements in an aggregate amount of at least $1 billion. As PG&E
Corporation may be unable to provide the acceptable credit support, the
capital infusion obligations would be triggered. As PG&E Corporation
may be unable to make such capital infusions, PG&E Corporation would be
in default under these agreements.
Various legislative, regulatory, and legal remedies to the California
crisis are being pursued, but their outcome is uncertain and the
solution is not likely to be immediate. The Utility and PG&E
Corporation are attempting to avoid bankruptcy. It is the Utility's
intention to continue to pay employees, vendors, suppliers, and other
creditors to maintain essential distribution and transmission services,
including continuing to pay suppliers of natural gas under normal
payment terms. However, the Utility is not in a position to pay
maturing or accelerated obligations, including accelerated payments
under gas supply contracts, nor is the Utility in a position to pay the
ISO, PX, and the QFs, the massive amounts due for the Utility's power
purchases above the amount included in rates for power purchase costs.
If the Utility or PG&E Corporation fail to make certain debt payments of
$100 million or more, additional defaults may be triggered under both of
the Utility's and PG&E Corporation's facilities. The Utility's current
actions are intended to allow the Utility to continue to operate while
efforts to reach a regulatory or legislative solution continue. It is
possible that PG&E Corporation or the Utility could be forced into
bankruptcy proceedings. If this were to occur, payments to trade
vendors, suppliers and creditors would be subject to significant delays
associated with the lengthy bankruptcy court process.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
PG&E CORPORATION
By: CHRISTOPHER P. JOHNS
-----------------------------
CHRISTOPHER P. JOHNS
Vice President and Controller
PACIFIC GAS AND ELECTRIC COMPANY
By: DINYAR B. MISTRY
-----------------------------
DINYAR B. MISTRY
Vice President and Controller
Dated: January 17, 2001
