The credit “assessment,” or opinion of Standard & Poor’s that surfaced Wednesday in the third day of Pacific Gas and Electric Co.’s Chapter 11 bankruptcy confirmation hearings has strengthened the utility’s argument that the competing reorganization plan from state regulators and the official unsecured creditors’ committee will not work in getting the utility back to investment-grade credit ratings. The utility sees it as proof the alternative plan can’t be confirmed by the federal bankruptcy judge.

The California Public Utilities Commission did not have a reaction to the S&P’s assessment last week, but through its San Francisco-based spokesperson, the regulators said they plan to respond on Monday.

While carefully noting that its assessment of the CPUC/creditors’ committee alternative reorganization plan was not a credit rating, per se, and was not provided as “expert testimony” in a legal sense, S&P’s made an assessment of $7.845 billion in principal senior secured debt, $1 billion in senior unsecured debt and $932 million par amount of preferred stock in the PG&E utility. The secured debt, but not the unsecured and equity, is potentially “marginal investment grade” credit quality; the rest would carry “speculative” credit rating grades.

S&P’s further outlines a list of 20 conditions–all of which must be met–for the $7.845 billion of secured debt to gain an ultimate investment-grade rating. It all “hinges on the satisfaction of each of the issues cited in this letter and on the conditions below having been met,” wrote S&P’s Ronald Barone, head of its utilities, energy and project finance group, in a Nov. 19 letter to the CPUC and creditors’ committee.

PG&E’s utility reacted quickly, using a written reaction statement characterizing the S&P’s assessment as badly hurting the confirmation chances of the CPUC/creditors’ plan alternative.

“The S&P’s letter belies the CPUC’s oft-repeated claim that its plan wuld allow the utility to emerge from bankruptcy in a financially sound condition,” PG&E’s utility statement said. “The securities issued to pay creditors should be investment grade. Most important, Pacific Gas and Electric Company must emergy from bankruptcy as an investment-grade company. The S&P assessment reveals that the CPUC bankruptcy plan fails to reach either mark.”

PG&E argued that the S&P assessment supports its contention that the CPUC plan would not allow the utility to resume wholesale power purchasing because it would lack an investment-grade credit rating, and it would, in fact, leave the utility “financially weakened” long after the bankruptcy case ended.

Even the large secured chunk of debt would be only “marginal investment grade,” which PG&E characterizes as “teetering” just above junk level because the inherent value of the utility’s assets are pledged against the debt.

“PG&E continues to believe it has developed the only feasible solution tht allows the utility to emerge from Cahpter 11 as an investment-grade company, gives the state of California a clearly defined path to exit the power buying business and provides fro continued enviornmental protections,” the utility statement said. “The company’s plan of reorganization achieves these objectives without asking the Bankruptcy Court to raise rtes or the state for a bailout.”

Some of the S&P “conditions” for getting an ultimate investment-grade rating on secured debt are:

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