New York, NY) - In remarks to be given later today at Morgan Stanley's 10th Annual Global Electricity & Energy Conference, Robert D. Glynn, Jr., Chairman, CEO and President of PG&E Corporation (NYSE: PCG) will update attendees on the progress in Pacific Gas and Electric Company's Plan of Reorganization (POR), the unit's strong operational performance, and the state of restructuring negotiations at the PG&E National Energy Group (PG&E NEG). Glynn's presentation will note that Pacific Gas and Electric Company and the PG&E NEG are each pursuing clear, independent courses of action toward resolving uncertainty. He will also state that he and the Board of Directors believe that accomplishing these objectives is the foundation for delivering growing long-term value for shareholders. The full text of Glynn's prepared remarks follows and is posted on the company's web site, www.pgecorp.com
This press release and the following remarks contain forward-looking statements that are necessarily subject to various risks and uncertainties. These statements are based on current expectations and assumptions which management believes are reasonable and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements.
Prepared Remarks of
Robert D. Glynn, Jr.
Chairman, Chief Executive Officer, President
10th Annual Global Electricity & Energy Conference
March 13, 2003
The Essex House
New York, New York
Thank you for the invitation to join you today and to give you an update on PG&E Corporation. Today's remarks will comment on:
- Pacific Gas and Electric Company's Plan of Reorganization, or POR;
- PG&E National Energy Group's restructuring negotiations; and
- Pacific Gas and Electric Company's continued strong operational performance.
Progress in Pacific Gas and Electric Company's Plan of Reorganization
Since the inception of Pacific Gas and Electric Company's Plan of Reorganization, we have held to three basic objectives:
- Pay all valid creditor claims, in full, with interest.
- Avoid raising electric rates for customers (or asking the State of California for a bail-out).
- Have all resulting businesses and securities rated "investment-grade" at the time we exit Chapter 11.
We have taken steps to achieve these objectives, most recently by the parent's commitment to provide up to $700 million to support investment-grade credit ratings; and we have obtained Lehman Brothers' commitment letter to stand behind our commitment. We are prepared to issue this equity unless other additional monies - such as from lower-than-anticipated creditor claims, FERC-ordered generator refunds, or other sources - are available to reduce or eliminate altogether the need to issue the new equity.
And, it is in our shareholders' interest to see the PG&E plan implemented because its implementation should result in a significant improvement in equity value, which is clearly our intention to accomplish, and which is clearly our right as a solvent debtor in this bankruptcy proceeding - the right of the debtor to maximize the value of the estate for all those who have a claim on it, including equity.
These enhancements to our plan result from our interactions with Standard & Poor's (S&P) a few weeks ago, after which S&P revisited its preliminary rating evaluation of the corporate credit ratings of the entities and the securities proposed to be issued by the Pacific Gas and Electric Company and the new companies, or NewCos, that would result from the company's POR.
S&P stated that the approximately $8.5 billion of securities proposed to be issued by the reorganized Utility and the NewCos, as well as their corporate credit ratings, would be capable of achieving investment-grade ratings of at least BBB-.
Our equity commitment, backed by Lehman's commitment letter, significantly strengthens the already strong financeability of our plan.
Judicial Settlement Conference
The court has issued an order to commence a judicial settlement conference, and we are fully complying with the order. The court has also stayed proceedings in the confirmation trial, including discovery, for 60 days. It is worth noting that there is nothing to suggest that the CPUC's plan or position in the confirmation trial provides a basis for a legal, feasible, or durable settlement.
In the confirmation hearing, our testimony regarding the PG&E plan and the CPUC alternate plan includes a clear description of one of the most critical distinctions between the plans. The distinction is that, under the PG&E plan, both the securities issued to repay creditors and the reorganized entities themselves would receive investment-grade credit ratings, while the CPUC plan would have the out-of-bankruptcy company a "junk bond" company with "junk" securities.
This critical distinction is one of the reasons why our team is so committed to the PG&E plan and helps to explain our answers to previously posed questions about a negotiated settlement.
No party has identified a plan, other than ours, that will accomplish these three objectives: not the CPUC, not the Official Creditors Committee, or any other party.
Why is it so essential for the entities and the securities to be investment-grade from the outset?
First, we believe that the very large financing to implement our plan will only be available from investment-grade debt markets.
- Second, on a going-forward basis, these new businesses are capital intensive as they provide the growing and critical energy infrastructure for Northern and Central California. Financial exhibits we have filed with the Bankruptcy Court show capital expenditures that average more than $1.7 billion per year for the four companies combined, and assume standard working capital facilities. Over time, these companies will need to refinance maturing debt, initiate the economic refinancing of existing debt, and continually balance their capital structure. This can only be accomplished efficiently and with certainty by investment-grade companies.
- Another important consideration is that these businesses are commercial counterparties to very large, long-term contracts, such as for gas and electric energy. Most commercial enterprises require investment-grade status for their counterparties, or otherwise require large and expensive letters of credit or cash deposits. Few will do business otherwise with "junk bond" companies.
- Last, returning from a "junk bond" credit rating to investment-grade credit rating isn't something that just automatically happens. In a recent study Standard & Poor's found that of 383 issuers that were downgraded below investment-grade between 1987 and 2002, only one-quarter of the total have returned to investment-grade status.
These reasons show clearly why we believe that the reorganized companies must be investment-grade on day one and that we can settle for nothing less.
And, this explains a big part of the reason why we do not support the CPUC plan. We believe the CPUC plan would not achieve investment-grade credit ratings for the reorganized business, and it would not achieve investment-grade credit ratings even for many - if not all - of the securities that would be issued to pay creditors. Although the CPUC has changed or modified its plan several times, it still has not approached receiving an investment-grade rating - again, not for many of the securities and certainly not for the reorganized company.
Nor do we believe the CPUC plan has only a short gap to bridge in order to achieve investment grade. Even with credit ratios that traditionally might suggest a rating well above the investment-grade threshold, we are seeing ratings that are much lower.
In our experience with the rating agencies, the bar has been raised for achieving investment grade, and based on our analysis of the CPUC-plan credit ratios we don't believe the CPUC plan can clear the bar.
Our Plan is Simple
Against a cacophony of claims of complexity, our plan of reorganization remains remarkably simple, and its core elements have not changed since it was first filed. Under our plan, we will:
- Reorganize the business.
- Refinance the reorganized business.
- Pay creditors with the proceeds from the refinancing (along with cash on hand and notes).
These are the things that companies do in Chapter 11; that's where Pacific Gas and Electric Company is; that's why these elements are in our plan. We aren't in a regulatory proceeding; we're in Federal Bankruptcy Court.
The recent changes that enhance the financing element of our plan ensure that investment-grade status is achieved.
Based upon these facts, it's not surprising that creditors voted overwhelmingly to support our plan. Here's the result of that vote.
Of the 10 classes of creditors voting on the company's plan, nine supported it. Only one class supported the CPUC plan. That class had exactly eight creditors in it out of a total of 18,129 creditors.
Since the vote, our plan has become financially stronger.
PG&E National Energy Group
Last summer, PG&E NEG's credit rating was dropped to below investment-grade, causing a number of financial difficulties, many also experienced by others in the sector. Since then we have taken steps to respond to the financial challenges, modified our business plan, and sought consensual resolution with PG&E NEG's lenders. We have also identified in our SEC disclosures that if a consensual restructuring is not achieved, the likely outcome would be Chapter 11 filings for PG&E NEG and some of its subsidiaries that would result in no further relationship between PG&E Corporation and the current PG&E NEG business.
As to steps we have taken to respond to the financial challenges, we agreed to cooperate with the lenders for the GenHoldings projects and La Paloma and Lake Road in exchange for their forbearance and continued funding of construction. We have also announced our intent to sell PG&E NEG's USGen New England operations. And, in the fourth quarter of 2002, the PG&E NEG wrote off, impaired or abandoned investments in a number of power plant development and construction projects, and equipment. The full discussion of this is contained in our SEC filings.
Regarding changes to our business plan, PG&E NEG is continuing to significantly reduce its energy trading operations. Our objective is to limit the trading and risk management activities to only what is necessary for the energy management services to facilitate the transition of our merchant generation facilities through their sale, transfer, or abandonment process and to provide for fuel into and power out of our IPP plants.
With respect to negotiations with PG&E NEG lenders, since last fall, we've been actively engaged with them, with the goal of reaching a consensual restructuring agreement. We've undertaken to do this confidentially, and thus won't be providing specifics at this time.
Among the challenges we face is the sheer complexity of the negotiations, given the number of parties - there are five bank syndicates in total, with about 40 banks, and there are holders of about $1 billion in bonds.
It is fair to say that the goal of these negotiations is to find a mutually acceptable restructuring; that various agreements have been reached - for example, agreements to continue funding some projects in construction; and that the parties recognize that there are substantial challenges. We believe that the preferred outcome, and the one that provides better value for PG&E NEG's lenders and for PG&E NEG, is the consensual route.
Pacific Gas and Electric Company Operational Performance
The third and final portion of these remarks is the strong operational performance of Pacific Gas and Electric Company in 2002, as it continued to deliver safe, reliable electric and gas service.
Customers responding to its customer service survey provided high marks, with more than 90 percent rating their service as good, very good or excellent.
Safety performance was strong, with total lost-time incidents down 21 percent from 2001 and fewer than any in the last 10 years.
We continued a sustained five-year trend of reliability improvement, with outages down by 20 percent in frequency and duration over that period.
Late last year, Pacific Gas and Electric Company launched a new customer information system that will ultimately provide better service for customers, including quicker customer service, reduced transaction time for customer service transactions, and greater flexibility in adjusting to changing customer or market demands.
We continued excellence in energy efficiency programs, with almost one-third of residential customers qualifying for the 20 percent rebate program, and we received the "Champion of Energy Efficiency" Award from the American Council for an Energy-Efficient Economy.
And all of this was accomplished while Pacific Gas and Electric Company operated with the lowest system-wide average electric rates among the state's three largest investor-owned utilities.
Each of our businesses is pursuing a clear, independent course of action towards resolving its uncertainty. At PG&E NEG, negotiations are in progress, and we believe that NEG lenders will get better value from a consensual outcome than otherwise. At Pacific Gas and Electric Company, we believe the PG&E plan is the only confirmable plan, and our team is ready to implement that plan once we have a confirmation order and regulatory approvals.
I and our board believe that accomplishing these objectives is the foundation for our operations to deliver growing long-term value for shareholders, and that is what we intend to deliver. Thank you.