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Announcement:

Moody's affirms PG&E's ratings; outlook stable

Global Credit Research - 29 Mar 2011

Approximately $16 Billion of Debt Securities and Bank Facilities Affected

New York, March 29, 2011 -- Moody's has affirmed the ratings of Pacific Gas and Electric Company (PG&E: A3 senior unsecured) and its parent, PG&E Corporation (PCG: Baa1 senior unsecured). The rating outlook for PG&E and PCG remains stable.

Concurrent with this rating affirmation, Moody's has assigned a (P)A3 rating to the shelf registration for PG&E's prospective issuance of senior unsecured notes and has assigned ratings of (P)Baa1, (P) Baa2, and (P) Baa3 to a multiple shelf registration for PCG's prospective issuance of senior unsecured notes, subordinated notes, and preferred stock, respectively.

PG&E's A3 senior unsecured rating reflects the sustainability of strong credit metrics due in large part to the continuation of a credit supportive regulatory environment in California as well as a corporate strategy centered around regulated rate base growth through infrastructure related investments. Moody's calculates PG&E's average cash flow (CFO/pre-WC) to debt for the past three fiscal years at 24.8 %, average cash flow coverage of interest expense at 5.4x and average retained cash flow to debt of 20.3%, all of which position the company well in the "A" rating category. Going forward, while we expect the company to remain free cash flow negative due to a sizeable capital expenditure program, we expect the utility to generate similar metrics in the future. During 2011, PG&E expects to receive final regulatory decisions from the California Public Utilities Commission (CPUC) and from the Federal Energy Regulatory Commission (FERC) which will underpin cash flow, earnings, and key financial metrics for the next three to four years. Today's rating affirmation incorporates our expectations of credit supportive outcomes for the company's 2011 General Rate Case (GRC), the company's 2011 Gas Transmission and Storage Rate Case (GT&S), and the company's FERC Transmission Owner 13 (TO 13) rate case based upon settlements reached with key parties along with proposed decisions introduced by various commissioners and an administrative law judge. Moody's expects the outcome of these decisions to occur during the second and third quarter 2011 which represents a primary driver in today's rating affirmations.

That being said, PG&E faces many challenges in operating its business, several of which we believe are self-imposed. In our opinion, the PG&E brand, along with the firm's credibility have been damaged by management's mishandling of communications around the roll-out of a SmartGrid program as well as the company's sponsorship and funding of a ballot initiative measure, Proposition 16, which was ultimately defeated. Management received substantial criticism from various relevant state constituencies about its handling of these two events which was magnified after the tragic September 2010 natural gas pipeline explosion in San Bruno. While facts surrounding San Bruno and the condition of the company's pipeline system continue to surface, PG&E's ability to effectively address this issue and regain customer trust has been severely compromised.

With respect to San Bruno related costs, the company has indicated that the direct incremental costs for San Bruno were $63 million in 2010 with estimates that such direct costs for 2011 will range from $200 - $300 million. Additionally, the company has accrued $220 million during 2010 for costs related to third party liability claims and anticipates the range for those outlays in 2011 to be up to $180 million. Moody's believes that a portion of the direct costs for San Bruno will be recovered in rates with the remainder being borne by shareholders, including any penalties imposed by the CPUC. The majority of the third party liability claims are expected to be covered by insurance. In the end, the CPUC will decide whether ratepayers or shareholders, or both, will pay for the utility's costs incurred in testing, pipe replacement, or other direct costs, and our rating affirmation incorporates an expectation that such outcome will not materially compromise PG&E's financial strength.

Moody's acknowledges that the San Bruno explosion, along with Proposition 16 and the SmartGrid rollout have collectively damaged the company's credibility with key state constituencies making it more difficult for the company to conduct its business. As such, we believe that these events more weakly positions PG&E in the "A"- rating category. That being said, we also believe that the likely outcome of the company's three key regulatory proceedings will serve to mitigate these factors from a financial perspective causing us to maintain a stable rating outlook at this juncture.

The rating affirmation for PCG, the holding company, reflects the focused business strategy around its regulated utility, the fairly conservative dividend payout ratio, and the degree of structural subordination that exists for debtholders at the parent. Any changes in the rating or the outlook at PCG will depend upon rating changes that may occur at the utility.

The stable rating outlook for PG&E and PCG reflects the expected predictability of cash flows over the next several years due to the credit supportive mechanisms currently in place within the California regulatory compact that reduces cash flow volatility, coupled with the company's low business risk strategy. The stable rating outlook also factors in the company's plans to finance its sizeable capital spending over the next several years with sufficient equity capital to maintain a 52% equity ratio at the utility.

In light of the very large capital investment program and the challenges that the company faces from the San Bruno explosion along with rebuilding its brand with key stakeholders, limited prospects exist for the ratings at PG&E or PCG to be upgraded in the near-term.

The rating of PG&E and PCG could be downgraded if the company's credibility issues reach the point where the current regulatory compact is altered such that there is meaningful cost recovery leakage over an extended period or that the utility's cash flow to total debt declines to below 22% , the utility's retained cash flow to total debt declines below 18% or the ratio of the utility's cash flow to total interest falls below 4.5x for an extended period.

In this rating action, Moody's has affirmed all of PG&E's and PCG's ratings, including all PG&E senior unsecured debt, all senior unsecured tax-exempt debt, its Issuer Rating, and senior unsecured bank credit facility at A3, all PG&E preferred stock at Baa2, PG&E's short-term rating for all commercial paper at Prime-2, as well as all PCG's senior unsecured debt and bank credit facility at Baa1.

The principal methodology used in rating PG&E and PCG was Regulated Electric and Gas Utilities rating methodology published in August 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

Headquartered in San Francisco, California, PCG is a holding company that conducts its business primarily through PG&E, a vertically integrated utility. At year-end 2010, PCG's total assets were $45.6 billion.

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms PG&E's ratings; outlook stable
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