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03 Mar 2005
MOODY'S UPGRADES THE ISSUER RATING OF PACIFIC GAS AND ELECTRIC COMPANY TO Baa1 FROM Baa3; ASSIGNS Baa3 ISSUER RATING TO PG&E CORPORATION; RATING OUTLOOK IS STABLE
Approximately $8 Billion of Debt Securities Affected.
New York, March 03, 2005 -- Moody's Investors Service upgraded the ratings of Pacific Gas and Electric
Company (PG&E: Issuer Rating to Baa1 from Baa3). The
upgrade concludes the review for possible upgrade that was initiated on
December 13, 2004. Moody's also assigned a Baa3 Issuer Rating
to PG&E Corporation (PCG), the parent of PG&E, and
assigned a Baa3 rating to PCG's $200 million unsecured bank
revolving credit facility. PCG was previously unrated. The
rating outlook is stable for PG&E and PCG.
The rating upgrade reflects a number of recent positive developments,
which collectively strengthen PG&E's credit quality.
These events include:
1. Strong financial performance since PG&E emerged from bankruptcy
in April 2004 and prospective financial metrics that are consistent with
the higher rating;
2. PG&E's issuance of approximately $1.9
billion of Energy Reduction Bonds (ERBs) in February, which help
to accelerate the recovery of the $3.7 billion pre-tax
regulatory asset, that was established when the utility emerged
from bankruptcy in April 2004. PG&E intends to fully recover
this regulatory asset by November 2005;
3. The continuation of a more constructive regulatory environment
as evidenced by the California Public Utilities Commission's (CPUC)
December 2004 decisions on various PG&E rate matters;
4. The extinguishment of PCG's ownership in National Energy
& Gas Transmission during fourth quarter 2004 focuses the company's
business on lower risk integrated utility operations.
The upgrade of PG&E incorporates recent regulatory and legislative
decisions that are supportive, underpinned by the settlement agreement
with the CPUC and the bankruptcy court. These developments increase
the predictability of the company's cash flow for the next few years.
Various December 2004 CPUC decisions extended the existing mechanism for
PG&E to recover procurement related costs for ten years, generally
adopted most aspects of the utility's long-term procurement
plans, approved the revenue requirement for the next three years
for PG&E's intrastate natural gas business, and accepted
the company's cost of capital regulatory filing, consistent
with the terms of the settlement agreement. These decisions,
coupled with the May 2004 general rate case decision for electric rates,
should help to produce fairly predictable cash flows for the next several
years. Moody's anticipates that the company's adjusted
funds from operations (FFO) to adjusted total debt will be approximately
25% and its FFO coverage of adjusted interest expense is expected
to exceed 5.0x over this timeframe. These prospective financial
measures are more consistent with the higher rating given the perceived
decline in the company's business risk as a result of favorable
regulatory trends and the more narrow focus on core utility operations.
The rating of PG&E also considers numerous unresolved state and federal
regulatory issues, as well as related litigation. In addition,
the infrastructure needs of the company's service territory are
material due to an aging transmission and distribution network and the
substantial reliance on power generated from older, less efficient
natural gas-fired plants and out-of-state imports,
particularly hydro resources from the Pacific Northwest that can be volatile
on a year-to-year basis. While the region's
generation supply should be adequate this summer, adding generation
and infrastructure assets within the state remains challenging.
There is some uncertainty concerning the regulatory framework that would
result if the state reintroduces some form of direct access, as
is supported by the governor. Legislation dealing with this issue
is likely to be considered this year.
The rating also incorporates the utility's high average electric
rates for residential and commercial customers and its limited ability
to take steps to address its high costs for purchased power. A
large portion of PG&E's retail revenue requirement relates to
power procurement, including transfers or payments to third parties
such as the California Department of Water Resources and qualifying facility
owners. The terms of these underlying power purchase agreements
limit the utility's ability to lower rates for the next few years.
Given the company's high retail electric rates, the improving
but still challenging relationship that the company has with certain key
constituents in the state, and the tenor of the bankruptcy settlement
agreement, it is possible that elements of the settlement agreement
will be challenged in court by additional third parties at some point
during the life of the settlement agreement. The ratings incorporate
our expectation that the settlement agreement would withstand such challenges
given the continuing jurisdiction of the bankruptcy court that confirmed
The rating of PG&E's senior secured debt is the same as its
Issuer Rating because we are anticipating that all of this debt will shortly
become unsecured. The terms of PG&E's senior secured
indenture provide for the release of collateral securing the debt after
certain conditions are satisfied, including that the company's
Issuer Rating is Baa2 or better. This release mechanism affects
the company's first mortgage bonds, pollution control bonds,
and the revolving credit agreement. Moody's notes that once
the collateral has been released and the debt becomes unsecured,
the terms of the indenture has negative pledge language which prohibits
the granting of future liens on debt, subject to certain limited
exceptions, including the ability of PG&E to incur secured debt
equal to an amount not more than 10% of its net tangible assets
at December 31, 2003.
The assignment of a Baa3 Issuer Rating at PCG considers the structural
subordination of debt at the holding company relative to the debt at the
operating utility and matches the lowest rated instrument at the operating
company level. The rating also considers the substantial degree
of ring fencing that exists between PG&E and PCG, including
the requirement that the utility maintain a 52% common equity ratio
in order for dividends to be paid to the parent. Holding company
debt is modest, consisting of a $280 million convertible
subordinate note due 2010. PCG also has a $200 million unsecured
revolving credit facility due December 2007, which is available
for occasional working capital needs at the parent. The revolving
credit facility includes covenants requiring PCG to maintain a ratio of
total consolidated debt to total capitalization of not more than 65%
as defined in the credit agreement, and to maintain 80% ownership
of PG&E's stock.
The stable rating outlook for PG&E and PCG reflects the expected predictability
of cash flows over the next several years due to the strength of the settlement
agreement, reinforced by recent decisions from the CPUC, along
with the lower risk back to basics business strategy of the corporation.
The stable rating outlook also considers the company's plans to
finance its sizeable capital spending over the next several years largely
with internally generated funds, and its plan to utilize a portion
of the ERB financing proceeds to repurchase up to $1.6 billion
of PCG common stock during 2005, while maintaining a common equity
ratio at the utility of at least 52%.
The rating could be upgraded if significant uncertainties are favorably
resolved in relation to regulatory, legislative, and litigation
issues. These include recovery of the remaining regulatory asset
balance, the manner in which direct access or competition is reintroduced
in the state, and adequate prospects for adding needed reliability
related resources in a timely fashion. The rating could be downgraded
if the recent improvement in regulatory and legislative support is not
sustained or if the company manages its capital allocation requirements
at the utility and at the parent more aggressively than expected.
PG&E ratings upgraded are:
- First mortgage bonds, secured pollution control bonds,
and secured bank loan agreement to Baa1 from Baa2, with the expectation
that these instruments will shortly become senior unsecured in accordance
with provisions in the indenture and the loan agreement;
- Issuer Rating to Baa1 from Baa3;
- Preferred stock to Baa3 from Ba2;
- Shelf registration for the issuance of first mortgage bonds to
(P)Baa1 from (P)Baa2, and the issuance of senior unsecured debt
to (P)Baa1 from (P)Baa3.
Headquartered in San Francisco, California, PCG is a parent
holding company, whose principal operating subsidiary is PG&E,
a public utility that is principally engaged in providing electricity
and natural gas distribution and transmission services in Northern and
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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