Culminating a week of progress in pulling together the financing underpinning of its exit from Chapter 11 bankruptcy protection, Pacific Gas and Electric Co. on Friday announced that it intends to offer $6.7 billion in first mortgage bonds to help pay credit claims in its $12 billion utility bankruptcy. This followed announcement earlier in the week that the utility secured $2.9 billion in credit facility commitments and authorization from California state regulators for its new financial structure.

In addition, last Thursday, Standard & Poor’s Ratings Services announced that it anticipates giving PG&E’s utility a lower-run investment grade credit rating (BBB-) next month, along with a stable rating outlook as it leaves Chapter 11 in April.

PG&E said the first mortgage bond offering will be completed under a shelf registration statement previously filed with the Securities and Exchange Commission, and the bonds will be sold in multiple tranches, or increments. “The bonds will be offered only by means of a prospectus, meeting the requirements of the 1933 SEC Act,” the utility said.

Lehman Brothers and UBS Investment Bank will act as joint bookrunners for the $6.7 billion offering. A written prospectus supplement and the related prospectus are available for Lehman Brothers’ New York City offices.

The earlier announced financing for $2.9 billion will provide needed working capital and refinance certain obligations the utility said are related to pollution control bonds. “The funds also may be used to pay a portion of the utility’s creditor claims on the effective date of the reorganization, which is the earliest date that draws on these facilities may be made,” PG&E said.

On March 5, PG&E’s utility said it entered into a series of agreements totaling the $2.9 billion:

Implementation of the overall settlement, which is expected next month, is subject to various conditions, among which are receipt of investment-grade credit ratings and finalizing a public offering for the balance of the financing needs, according to a PG&E utility announcement. With these latest steps and those two additional ones, the utility should emerge from Chapter 11 three years after filing in April 2001.

A prepared statement from the company in response to S&P said investment-grade credit is a “key to the company’s ability to successfully complete the financings necessary to emerge from Chapter 11,” which it has been operating under for three years. “S&P’s announcement brings us closer to reaching that milestone.”

PG&E’s utility has yet to hear from the other two major rating agencies — Moody’s Investor Services and Fitch — but terms of the utility’s bankruptcy settlement with state regulators and the federal bankruptcy court require it gaining investment grade ratings from both S&P and Moody’s, a PG&E utility spokesperson said.

With the investment-grade ratings, PG&E’s utility expects to be able to purchase energy and build new service infrastructure more cost-effectively, thus, ultimately saving its retail utility customers millions of dollars, the utility said. It noted the earlier this week the company secured $2.9 billion in credit facilities to support its working capital needs and to refinance certain obligations related to pollution control bonds. “Part of the funds from those agreements also may be used to pay a portion of the company’s creditor claims on the effective date of the plan of reorganization,” the utility said.

S&P said its anticipated ratings upgrade “reflects the utility’s current and projected financial profile, as well as the regulatory, operational and litigation risks facing PG&E. Ratings will not be assigned to the utility’s parent, PG&E Corp., a holding company whose debt has been privately placed.”

For the PG&E utility’s senior secured debt that will be issued to finance the bankruptcy reorganization plan and exiting of Chapter 11, S&P said it expected to make the rating a notch higher at triple-B (BBB) “on the strength of the assets being pledged.”

The early conclusion that S&P has come to — and that PG&E and regulators fully expected — is that the company can regain its “investment-grade attributes” through the utility settlement with the California Public Utilities Commission and its creation of a $2.21 billion regulatory asset” on the utility’s balance sheet. The regulatory asset will be amortized over the nine-year life of the settlement.

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