On September 28, 2022, Pacific Gas and Electric Company (“PG&E”) filed an application at the California Public Utilities Commission requesting approval to transfer substantially all of its non-nuclear generation assets to a newly created subsidiary, Pacific Generation (A. 22-09-018). Pacific Generation will sell less than 50% of its equity interest to third party investors, leaving PG&E with majority ownership. The proposed transaction is represented by PG&E as the “best path” for PG&E to raise equity capital to meet its near term capital needs to improve system safety and reliability, mitigate risk, and invest in electrification and related state-sponsored efforts to combat climate change.
Assets that would be transferred are described as including PG&E’s hydroelectric, natural gas, and solar generation assets, and the Elkhorn battery energy storage system (with a few small hydro and solar facilities excluded). The generation capacity of these assets is approximately 5.6 gigawatts, including 3,848 MW of hydroelectric and 1,400 MW of natural gas generation. The 2023 weighted average forecasted rate base of the generation assets proposed for transfer is approximately $3.5 billion.
Pacific Generation is proposed to be a Commission-regulated cost-of-service public utility with resources committed to PG&E’s capacity and energy needs. Pacific generation’s capital structure is requested to be 52% equity and 48% long-term debt, and the application requests authority for Pacific Generation to issue up to $2.1 billion in long-term debt. PG&E personnel will continue to operate and maintain the new subsidiary’s assets.
As part of this application, PG&E is requesting, in part:
- Approval to transfer substantially all of its generation assets to Pacific Generation;
- Issuance of a Certificate of Public Convenience and Necessity (“CPCN”) for Pacific Generation to operate as a CPUC-jurisdictional public utility electrical corporation owning electric plant under the Public Utilities Code;
- A finding that the Pacific Generation assets will continue to be dedicated to the public and operated by PG&E in the same manner as today;
- Approval for Pacific Generation to issue long-term and short-term debt secured by utility property;
- Approval for Pacific Generation to file tariffs, including joint tariffs and rate schedules with PG&E;
- Confirmation that PG&E will own a majority of the Pacific Generation equity interests and maintain day-to-day operational and managerial control of Pacific Generation; and
- Confirmation that Pacific Generation will be treated as a regulated subsidiary of PG&E for purposes of the CPUC’s affiliate transaction rules, and confirmation that the proposed transaction does not trigger the gain on sale rules because the assets are transferred at book value, will remain dedicated to public service, and subject to cost-of-service regulation.
PG&E is proposing a two-stage regulatory process. Under this proposal, the first stage will be the formal proceeding leading to a Commission decision on the application in July 2023. The second stage of the process would include regulatory approval of the PG&E-Pacific Generation Separation Agreement, and approvals of proposed tariffs and tariff revisions. Necessary approvals from the Federal Energy Regulatory Commission, including approval of the sale of the minority equity interest to third party investors, will be pursued in parallel with the CPUC application proceeding.
PG&E is requesting an expedited proceeding schedule with a goal to close the proposed transaction with Pacific Generation minority interest investors by the end of 2023 in order to meet upcoming capital requirements in late 2023 and 2024.
The proposal will enable PG&E to immediately raise capital for electric plant improvements, enhance the creditworthiness of the new entity through participation by the investors, and create a mechanism to generate income distributions to those investors. Currently, PG&E does not make dividend payments to shareholders due to restrictions associated with its restructuring and the operation of the wildfire victim’s fund.The spin-off proposal would avoid dilution of the current equity’s value, but create a new mechanism to provide returns to investors participating as minority owners of Pacific Generation.
The new proceeding was noticed in the October 5, 2022 CPUC Daily Calendar, and responses / protests will be due on November 4, 2022.
Please contact Andy Brown or Chase Maxwell with any questions regarding the PG&E generation asset transfer or other matters related to the CPUC’s application proceeding process.