PG&E 2008 Annual Report Download - page 108

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In 2005, the Utility purchased fi nancial guaranty insur-
ance policies to insure the regularly scheduled payments on
$454 million of pollution control bonds series 2005 A-G
issued by the CIEDB. Interest rates on these bonds were set
at auction every 7 or 35 days. In January 2008, the insurer’s
credit rating was downgraded or put on review for possible
downgrade by several credit agencies. This, in addition to
credit issues that impacted the auction-rate securities mar-
kets, resulted in increases in interest rates for these bonds.
To reduce the interest rate expense, the Utility repurchased
$300 million of the bonds in March 2008 and the remain-
ing $154 million in April 2008. The Utility refunded
$404 million of the bonds, as described below, and antici-
pates refunding the remaining $50 million of the bonds in
2009, subject to conditions in the tax-exempt bond market
and the liquidity needs of the Utility.
On September 22, 2008, the CIEDB issued $50 million
principal amount of pollution control bonds series F due
on November 1, 2026 and $45 million principal amount of
pollution control bonds series G due on December 1, 2018
for the benefi t of the Utility. These series of bonds refunded
the corresponding related series of 2005 bonds. Both series
bear interest at 3.75% per year through September 19, 2010
and are subject to mandatory tender on September 20,
2010 at a price of 100% of the principal amount plus
accrued interest. Thereafter, these series of bonds may
be remarketed in a fi xed or variable rate mode.
On October 29, 2008, the CIEDB issued approximately
$149 million principal amount of pollution control bonds
series A and B due on November 1, 2026 and $160 million
principal amount of pollution control bonds series C and D
due on December 1, 2016 for the benefi t of the Utility. These
series of bonds refunded the corresponding related series
of 2005 bonds. The bonds bear interest at variable interest
rates not to exceed 12% per year. As of December 31, 2008,
the interest rate on the bonds ranged from 0.57% to 0.85%
and resets weekly.
for these bonds. With respect to the Series 1996 C, E, and
F bonds, the Series 1997 B bonds, and the Series 2008 A-D
bonds, the Utility reimburses the letter of credit providers
for their payments to the trustee for these bonds, or if a
letter of credit provider fails to pay under its respective letter
of credit, the Utility is obligated to pay the principal, pre-
mium, if any, and interest on those bonds. All payments on
the Series 1996 C, E, and F bonds, the Series 1997 B bonds,
and the Series 2008 A-D bonds are made through draws on
separate direct-pay letters of credit for each series issued by
a fi nancial institution.
All of the pollution control bonds fi nanced or refi nanced
pollution control facilities at the Geysers geothermal power
plant (“Geysers Project”) or at the Utility’s Diablo Canyon
nuclear power plant (“Diablo Canyon”) were issued as
“exempt facility bonds” within the meaning of Section 142(a)
of the Internal Revenue Code of 1954, as amended (“Code”).
The Utility agrees not to take any action or fail to take any
action if any such action or inaction would cause the inter-
est on the bonds to be taxable or to be other than exempt
facility bonds.
In 1999, the Utility sold the Geysers Project to Geysers
Power Company, LLC, pursuant to purchase and sale agree-
ments that state that Geysers Power Company, LLC, will use
the bond-fi nanced facilities solely as pollution control facili-
ties within the meaning of Section 103(b)(4)(F) of the Code.
Although Geysers Power Company, LLC, subsequently fi led
a petition for reorganization under Chapter 11, it assumed
the purchase and sale agreements under its Chapter 11 plan
of reorganization that became effective on January 31, 2008.
The Utility has no knowledge that Geysers Power Company,
LLC, intends to cease using the bond-fi nanced facilities solely
as pollution control bonds facilities within the meaning of
Section 103(b)(4)(F) of the Code.
The Utility has obtained credit support from insurance
companies for the Series 1996 A bonds and the Series 2004
A-D bonds, such that, if the Utility does not pay the
principal and interest on any series of these insured bonds,
the bond insurer for that series will pay the principal and
interest. The Series 2005 E bonds, which are currently held
by the Utility, are also insured.