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PG&E Corp. Borrows $1 Billion to Pay Debts

Energy: Action protects parent firm from bankruptcy, but leaves utility vulnerable. Sale of power grid to the state under rescue plan is still possible, sources say.


Faced with jittery creditors, the parent company of California's largest utility, Pacific Gas & Electric Co., took dramatic steps Friday to protect itself from being dragged into Bankruptcy Court but did nothing to prop up its debt-ridden subsidiary.

After disclosures that PG&E Corp. had secured a $1-billion loan to pay its own creditors, Wall Street credit rater Fitch Inc. warned that the company's San Francisco-based utility was facing the "near-term possibility of bankruptcy."

But state and utility sources said PG&E Corp. is still hoping to reach a rescue accord with Gov. Gray Davis that would involve the sale of its valuable transmission lines. A spokesman for the company denounced Fitch's warning as "irresponsible."

As aides to Gov. Gray Davis continued to negotiate with PG&E, sources said the utility earlier this week presented a proposal that put its massive transmission system on the table in exchange for the state's financial help.

A state takeover of the grid is a fundamental part of Davis' attempt to avert the utility's bankruptcy while providing Californians with a new and potentially valuable asset. Although the state's other teetering utility, Southern California Edison, had recently agreed in principle to sell its portion of the grid for $2.76 billion, PG&E had been holding tight.

Some in the administration greeted PG&E's proposal with optimism. But an accord remains far from certain. Basic elements have yet to be resolved, such as how much the utility wants for its portion of the grid and what other concessions the company and state will make.

"It's at a very delicate stage," said one source close to the negotiations.

Significant details remain to be resolved even with Edison and the smallest of the state's three utilities, San Diego Gas & Electric, which the governor believes will sell its piece of the grid for about $920 million.

Davis spokesman Steve Maviglio said he does not expect PG&E's financial maneuvering on Friday to affect the talks.

"The governor has always said he expects the parent companies to make a significant contribution to the utilities as part of a final deal and we will continue to press for that," Maviglio said.

The utility's creditors are not so optimistic.

The $1-billion loan that parent company PG&E Corp. obtained Friday from GE Capital and Lehman Bros.--offering a profitable subsidiary as collateral--will not be used to repay any of the utility's debt, estimated at more than $8 billion.

PG&E executives said the company moved to protect itself because of the recent formation of creditor committees, which could have forced both the far-flung company and its local utility into involuntary bankruptcy. Now only the utility is vulnerable.

Fitch Inc., one of three major firms that rate the credit worthiness of companies, said late Friday that the "failure to promptly resolve the numerous issues at the utility subsidiary could make bankruptcy a near-term possibility." Fitch said it was downgrading the utility's credit rating to "watch-negative" from "watch-evolving."

PG&E Corp. spokesman Greg Pruett denounced Fitch, saying: "It is really regrettable that this individual at this agency felt a need to put this information out, which, candidly, is misleading. It assumes facts not in evidence."

Pruett said utility executives "are pulling out all the stops to get a resolution in Sacramento. . . . We remain encouraged that ultimately, that is going to occur."

Throughout the state's energy crisis, Fitch has generally been the first of the Wall Street credit firms to issue warnings on the utilities' finances. But the other two major ratings players--Moody's and Standard & Poor's--have ultimately followed suit.

Gary Ackerman, executive director of a group representing power generators who are among PG&E creditors, said Fitch's move suggests that Davis' visit with financial analysts in New York on Wednesday left them nervous.

"I can only speculate that Davis' visit was not enough to make Wall Street analysts comfortable that the bailout option as proposed by the governor is good enough," said Ackerman, of the Western Power Trading Forum, some of whose members are owed hundreds of millions by PG&E and Edison.

"We might have two situations here, where Edison stays out of bankruptcy and PG&E goes in," Ackerman said. "We all presume that what one does, the other does--and that might not be the case."

An Edison source said Friday it was a stretch to infer from PG&E's loan deal that the company's utility was heading toward bankruptcy. But if it should, he said, Edison could still reach a settlement with the state, perhaps using assets other than its transmission grid. "We want to be part of the solution," he said.

Unlike PG&E Corp., Edison International has not defaulted on any of its debts, although its Rosemead-based utility announced that it has missed $711 million more in payments to electricity suppliers.

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