Pacific Gas & Electric (PCG)

First Mortgage Bonds/Senior Notes

On March 23, 2004, the Utility closed a public offering of $6.7 billion of first mortgage bonds, or First Mortgage Bonds.  The First Mortgage Bonds were offered in multiple tranches consisting of 3.60% First Mortgage Bonds due March 1, 2009 in the principal amount of $600 million, 4.20% First Mortgage Bonds due March 1, 2011 in the principal amount of $500 million, 4.80% First Mortgage Bonds due March 1, 2014 in the principal amount of $1 billion, 6.05% First Mortgage Bonds due March 1, 2034 in the principal amount of $3 billion, and Floating Rate First Mortgage Bonds due April 3, 2006 in the principal amount of $1.6 billion.  The Utility received proceeds of $6.7 billion from the offering, net of a discount of $18 million.  The interest rate for the Floating Rate First Mortgage Bonds is based on the three-month London Interbank Offered Rate, or LIBOR, plus 0.70%, which resets quarterly.  At March 31, 2005, the interest rate on the Floating Rate First Mortgage Bonds was 3.26%.  On April 3, 2005, the rate was reset to 3.82%.  The next reset date is July 3, 2005.  First Mortgage Bonds in the aggregate amount of $2.5 billion also were used to secure the Utility’s obligations under various other debt agreements.

On October 3, 2004, the Utility partially redeemed Floating Rate First Mortgage Bonds due in 2006 in the aggregate principal amount of $500 million.  On January 3, 2005, in anticipation of the receipt of ERB proceeds, the Utility partially redeemed Floating Rate First Mortgage Bonds due in 2006 in the aggregate principal amount of $300 million.  On February 24, 2005, the Utility used a portion of the ERB proceeds to defease $600 million of Floating Rate First Mortgage Bonds due in 2006.  The defeased bonds were redeemed on April 3, 2005.

The First Mortgage Bonds were secured by a first lien, subject to permitted exceptions, on substantially all of the Utility’s real property and certain tangible personal property related to the Utility’s facilities.  The lien was released on April 22, 2005, upon satisfaction of various conditions specified in the indenture, including confirmation from Moody’s Investors Service, or Moody’s, and Standard & Poor’s Ratings Service, or S&P, that the Utility’s unsecured debt ratings following the release would be at least Baa2 from Moody’s and BBB from S&P.  On March 3, 2005, Moody’s increased the rating on the First Mortgage Bonds from Baa2 to Baa1.  On April 22, 2005, the Utility and the trustee entered into an amended and restated indenture to eliminate the provisions related to the lien of the mortgage.  The First Mortgage Bonds have been redesignated as follows:

Since the lien has been released there is no collateral securing the First Mortgage Bonds and the bonds, now designated as the Senior Notes as set forth in the table above, have become the Utility’s unsecured general obligations ranking pari passu with the Utility’s other unsecured debt.  Under the indenture for the Senior Notes, the Utility has agreed that it will not incur secured debt (except for (1) debt secured by specified liens, and (2) secured debt in an amount not exceeding 10% of the Utility’s net tangible assets, as defined in the indenture) unless the Utility provides that the Senior Notes will be equally and ratably secured with the new secured debt.