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PG&E’s Proposed Bankruptcy Settlement Excess Costs and Savings Potential with DRC Bond Issuance The Utility Reform Network September 3, 2003.

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Presentation on theme: "PG&E’s Proposed Bankruptcy Settlement Excess Costs and Savings Potential with DRC Bond Issuance The Utility Reform Network September 3, 2003."— Presentation transcript:

1 PG&E’s Proposed Bankruptcy Settlement Excess Costs and Savings Potential with DRC Bond Issuance The Utility Reform Network September 3, 2003

2 The Utility Reform Network 1 Overview PG&E’s goals for emerging from bankruptcy can be met at a lower cost for ratepayers PG&E’s settlement proposal is expensive DRC Structure creates substantial savings potential Enabling Legislation is a tool to: –Provide further assurances to the financial community –Speed implementation –Maximize savings

3 The Utility Reform Network 2 The Proposed Settlement is Expensive PG&E’s stated goals sound attractive –Pay claims 100% –Achieve investment grade ratings –Maintain CPUC jurisdiction –Dismiss pending litigation –Reduce rates But the structure as proposed is very expensive Modifications can likely yield substantial cost savings while meeting stated goals

4 The Utility Reform Network 3 Overview of the Settlement Pay all creditor and preferred stock claims in full –use cash on hand resulting from headroom collection –issue new long term debt sufficient to pay remaining claims –collect costs of new debt in rates Problem: –existing rate base will not support the amount of debt required to pay all claims PG&E’s solution: add $2.21 billion to rate base –sets rates well above cost of service to allow for investment grade ratings

5 The Utility Reform Network 4 PG&E’s Stated Rationales for the Regulatory Asset are Suspect Rationale #1: Regulatory asset is needed to obtain investment grade ratings –TURN’s analysis shows that a DRC structure can meet the same financial criteria at a much lower cost Rationale #2: The cost of the settlement is appropriate recovery of PG&E’s unrecovered costs –TURN’s analysis shows that from both an accounting and regulatory perspective, PG&E’s shareholders will recover more than 100% of legitimate unrecovered costs

6 The Utility Reform Network 5 Cost Recovery Under the Settlement

7 The Utility Reform Network 6 The Regulatory Asset is an Expensive Financing Mechanism The Reg Asset is not a source of cash to pay creditors, but is instead only support for raising additional debt using a traditional utility structure –Adding $2.2 billion to rate base raises only $1.1 b in debt at a 50/50 debt/equity ratio –Only $2.1 billion of $5.2 billion excess cost goes to service debt in capital structure –Remaining $3.1 billion goes to taxes and equity return The cost of the Reg Asset is based on the utility’s cost of capital –Debt portion likely to be rated BBB for PG&E as it emerges from bankruptcy –Equity portion based on allowed ROE (PG&E has proposed 11.2%) plus taxes The Reg Asset is an “instant” addition to rate base with no shareholder investment or risk required –Rate base will increase nearly 15% upon implementation (from nearly $15 billion to $17 billion)

8 The Utility Reform Network 7 The cost of the regulatory asset is primarily equity return

9 The Utility Reform Network 8 Rates under the proposed settlement are well above cost of service

10 The Utility Reform Network 9 Rates under the proposed settlement are in excess of previous proposals through 2012 Savings (Costs) vs. Settlement Agreement 1 st year 2004Nine years CPUC Plan vs. PSA($6) million$1.5 billion$1.2 billion PG&E Spin-Off Plan vs. PSA2-19 million$0.5-$1.3 billion($0.9) – $0.5 billion

11 The Utility Reform Network 10 PG&E Earnings are projected to be substantially above pre-crisis levels

12 The Utility Reform Network 11 PG&E’s own projections show dividends more than double pre-crisis levels

13 The Utility Reform Network 12 Proposed Modifications to Settlement Achieve stated goals Pay claims 100% Achieve investment grade ratings Maintain CPUC jurisdiction Dismiss pending litigation Reduce rates Reduce cost of raising funds needed to pay claims while achieving investment grade ratings Use an alternative financing structure to reduce interest costs Allow for additional savings potential

14 The Utility Reform Network 13 Raise funds through DRC Use dedicated rate component (DRC) as support for some or all of the debt needed to raise funds to pay claims DRC debt is not counted against utility credit quality Savings vs. Regulatory Asset: –Interest rate savings –Improves the credit quality of the utility by reducing the utility’s debt load –Eliminate the regulatory asset and the cost of the built-in “Cushion” Moves utility much closer to true cost of service

15 The Utility Reform Network 14 How the DRC works A “Dedicated Rate Component” is included in the utility’s tariff –This rate is sufficient to pay principal and interest on the DRC bonds –The funds collected are required to be used for the sole purpose of paying amounts due on the bonds –The DRC tariff is permanent until the bonds are paid in full The certainty of payment increases the security of the bonds and reduces interest charges Enabling legislation increases certainty that the tariff will stay in place –Enhances the strength of the CPUC’s promise to include the tariff in rates –Provides assurance that tariff will not be modified in the future Legislation provides key assurances to the financial community –Assures highest credit rating possible –Lowers interest costs

16 The Utility Reform Network 15 Savings Potential with a DRC Savings are a function of: –Size of the issuance: TURN Proposal is $2.03 billion –Term and amortization schedule TURN Proposal is 9 year term (matching Reg Asset) Level amortization for shorter average life Cost of DRC declines over time (vs. increasing cost of Reg Asset) –Interest rate spreads and ROE savings DRC will likely be AAA rated –Additional savings that accrue: TURN’s structure meets same financial criteria as Settlement for investment grade rating Elimination of regulatory asset and unnecessary financial “cushion” for investment grade ratings

17 The Utility Reform Network 16 Capital Structure Comparison Both structures raise enough cash to pay claims in full Reg asset artificially increases rate base to support debt requirement ERB raises debt off-balance sheet and improves utility debt ratio

18 The Utility Reform Network 17 Cost Comparison Total Savings vs. PSA = $2.8 billion Source: McDonald Partners, Inc.

19 The Utility Reform Network 18 Rate Reductions and Cumulative Savings Rate Reductions are double those under Settlement Agreement Source: McDonald Partners, Inc. Average Bundled Rate, cents/kWh PSA ERB Additional Rate Reduction, ERB

20 The Utility Reform Network 19 Shareholder Returns Still Exceed Historical Norms Source: McDonald Partners, Inc. corrected

21 The Utility Reform Network 20 Summary PG&E’s settlement structure is very expensive A DRC structure creates substantial savings TURN’s recommendations to the CPUC provide: –$2.8 billion in savings –Double the rate reductions Enabling Legislation is a tool to: –Provide further assurances to the financial community –Speed implementation –Maximize savings


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