PG&E Corp and Pacific Gas and Electric Company 8-K Summary
Business Context and Reporting Period
This Current Report (Form 8-K) dated May 13, 2004, concerns Pacific Gas and Electric Company (the Utility), a subsidiary of PG&E Corporation. The filing details a cost of capital application submitted to the California Public Utilities Commission (CPUC) on May 12, 2004. This application follows the Utility's emergence from Chapter 11 bankruptcy on April 12, 2004, and seeks to recover costs associated with its new capital structure and exit financing.
Key Financial Metrics and Capital Structure
The filing outlines current authorized rates and requested changes for 2004 and 2005:
- Current Authorized Rates: Return on Equity (ROE) of 11.22%; Cost of Debt of 7.57%; Cost of Preferred Stock of 6.05%.
- Current Capital Structure: 48.00% Common Equity, 46.20% Long-term Debt, 5.80% Preferred Equity.
- 2004 Requested Metrics:
- ROE: No change requested (11.22%).
- Capital Structure: 49% Common Equity, 2.8% Preferred Equity, 48.2% Long-term Debt.
- Weighted Average Cost of Debt: 5.82% (reflecting new debt at 5.17% post-April 12).
- Cost of Preferred Stock: 6.76%.
- Overall Rate of Return (ROR): 8.49%.
- Revenue Requirement Impact: Decrease of $106 million compared to current authorization.
- 2005 Requested Metrics:
- ROE: 11.60%.
- Capital Structure: 52.0% Common Equity, 45.5% Preferred Equity, 2.5% Long-term Debt.
- Cost of Debt: 5.94% (assuming $2 billion DRC financing).
- Cost of Preferred Stock: 6.42%.
- Overall Rate of Return (ROR): 8.90%.
- Revenue Requirement Impact: Increase of approximately $104 million over the 2004 reduction request (excluding DRC financing effects).
Material Changes and Settlement Agreement Provisions
Under the December 2003 Settlement Agreement, the Utility is guaranteed an ROE of no less than 11.22% and an equity ratio of no less than 52% until it achieves an investment-grade credit rating (A3 or A-). The agreement allows for the full recovery of financing costs and interest rate hedging fees for Chapter 11 exit financing. The 2005 request assumes the sale of approximately $2 billion in bonds secured by a Dedicated Rate Component (DRC) to rebalance the capital structure and fund infrastructure.
Outlook, Risks, and Contingencies
Legislative Contingency: The 2005 capital structure request relies on Senate Bill 772, which authorizes DRC financing. As of May 13, 2004, the bill had passed the California Assembly and was pending Senate consideration and Governor signature.
Procedural Timeline: Hearings for the cost of capital application are scheduled to begin August 23, 2004, with a proposed decision expected by November 2, 2004.
Rate Implementation: Electric revenue changes are proposed for January 1, 2005. Gas revenue changes are proposed for the next applicable rate proceeding.
Investor Verification Checklist
- Confirm the final passage and signing of California Senate Bill 772 to validate the $2 billion DRC financing assumption for 2005.
- Monitor the CPUC hearing schedule and the November 2, 2004, proposed decision date for approval of the requested capital structure.
- Verify the Utility's credit rating status with Moody's and S&P to determine if the 52% equity ratio floor under the Settlement Agreement remains in effect.
- Assess the impact of redeeming 2-year floating rate notes on the weighted average cost of debt for 2005.
- Review the specific timing of gas rate adjustments, as they differ from the proposed January 1, 2005, electric rate effective date.