Moody's puts Pacific Gas on upgrade review

Moody's Investors Service put Pacific Gas and Electric Co. on review for upgrade including its senior unsecured debt at Caa2, first mortgage bonds and the secured pollution control bonds at B3, preferred stock at Ca and PG&E Capital I's trust preferreds at Caa3.

Moody's aid the review follows the announcement of a proposed settlement agreement between Pacific Gas and Electric, its parent PG&E Corp., and the staff of the California Pubic Utilities Commission.

If this agreement is approved and adopted, it could allow the utility to exit bankruptcy by early 2004, avoiding long and protracted litigation between the utility and the CPUC.

Under the terms of the tentative agreement, the utility would pledge not to disaggregate the utility business as had been contemplated in its plan. Instead, the utility would remain vertically integrated under CPUC jurisdiction. The CPUC would acknowledge that it is fair and in the public interest for Pacific Gas and Electric to recover prior uncollected costs and to provide the utility's shareholders with an opportunity to earn a reasonable rate of return on the utility business.

The settlement requires numerous approvals including by the CPUC, the company's Board of Directors and the Bankruptcy Court.

Moody's said it expects that numerous consumer groups will oppose the settlement and the governor has already publicly stated his opposition to the plan. As such, approval by the CPUC is not assured.

The rating review will assess the prospects for the settlement being adopted along with the financial implications of the settlement to Pacific Gas and Electric's future earnings and cash flow profile.

Moody's notes that it is possible that the ratings of the utility could be upgraded before resolution of the bankruptcy since the all plans of reorganization, including the current one, contemplate 100% recovery rates for all valid creditor claims filed in the estate.

S&P cuts Mirant

Standard & Poor's downgraded Mirant Corp. and kept it on CreditWatch developing including its senior unsecured debt at CC and preferred stock at C and Mirant Americas Generation Inc.'s senior unsecured debt at CC and senior unsecured bank loan at CC.

S&P said the actions follow additional developments in Mirant's efforts to extend near- and intermediate-term debt maturities to avert a bankruptcy filing.

Mirant asked creditors holding approximately $3.5 billion of Mirant unsecured debt that matures on or before May 1, 2006, to amend terms to extend their debt maturities until July 15, 2008. The amendment is to be achieved by creditors exchanging their obligations for new obligations in which Mirant will pledge essentially all of its remaining unencumbered assets and grant warrants on Mirant's common equity.

If such an exchange were completed, the new obligations likely would have better recovery prospects in the event of a Mirant bankruptcy filing than the obligations they replace, and Mirant would receive more time to improve its profitability and financial position, S&P said.

However, S&P said it does not equate this form and process of settlement with the original terms of each obligation.

The rating actions follow Mirant's disclosure on June 20, 2003 that it also asked its bank group to vote on a prepackaged Chapter 11 bankruptcy filing plan, which could indicate difficulties completing the exchange offer, S&P said. The threshold for completing a prepackaged bankruptcy filing (two-thirds vote of creditors needed for approval) is less than for the exchange offer (requiring the approval of at least 85% of outstanding creditors).

Mirant also disclosed that its Mirant Americas Generation LLC unit received notice of a default on credit facilities from Lehman Brothers Commercial Paper Inc. because of its failure to deliver March 31, 2003, financial statements on a timely basis.

In addition to concerns that Mirant may be more likely to file for Chapter 11 bankruptcy protection, the lowering of the corporate credit rating reflects S&P's opinion that the planned exchange offer qualifies as a coerced distressed exchange.

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