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Rating Action:

Moody's assigns Baa3 rating to Pacific Gas & Electric's first mortgage bonds and B1 rating to PG&E Corp's senior secured debt; outlooks stable

15 Jun 2020

Over $32 billion of debt securities rated

New York, June 15, 2020 -- Moody's Investors Service (Moody's) assigned a Ba2 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR) and SGL-2 Speculative Grade Liquidity Rating to PG&E Corporation (PCG or parent). Moody's also assigned a B1 rating to PCG's approximately $4.75 billion senior secured (stock pledge only) debt.

At the same time, Moody's assigned a Baa3 rating to Pacific Gas & Electric Company's (PG&E or utility) senior secured debt. PG&E's secured debt includes approximately $9.6 billion of reinstated senior secured first mortgage bonds, approximately $11.9 billion of exchanged senior secured first mortgage bonds, and approximately $5.9 billion of new, incremental first mortgage bonds. Moody's also assigned a B1 rating to PG&E's $252 million of preferred stock. The rating outlooks for PCG and PG&E are stable.

As part of the plan of reorganization, PG&E's capital structure includes about $9.6 billion of reinstated pre-petition debt, approximately $11.9 billion of exchanged debt as amended in the restructuring support agreement, incremental new first mortgage bond debt of about $5.9 billion and a $6 billion of temporary secured term loan debt that is pari passu to the utility's first mortgage bonds. The reinstated and exchanged bonds were previously senior unsecured but are now senior secured first mortgage bonds upon emerging from bankruptcy. To the extent the temporary debt is in the form of short-dated bonds rather than a term loan, these bonds would also be pari passu to the first mortgage bonds, and therefore rated Baa3. PG&E expects to refinance this temporary debt with wildfire claim securitization bonds in the first half of 2021 if such bonds are approved by the California Public Utilities Commission (CPUC).

All of the debt in PG&E's capital structure is secured on a first lien basis by substantially all of the utility's real assets and certain tangible assets. The parent's $4.75 billion senior secured debt issuance could be in the form of either term loans or notes, secured in this case by a pledge of the stock of PG&E. All of the proceeds received as part of the debt issuances will be held in escrow until PCG and PG&E emerge from bankruptcy. The parent's term loan will be held at PG&E Corp Term Loan B Escrow temporarily until emergence. We note that PCG will be required to issue $9 billion of new equity as part of its emergence plan and, while an equity backstop commitment exists, challenges in executing this transaction remain. The successful execution of the equity issuance is assumed and incorporated in the organization's ratings. The ratings also incorporate our expectation that the company will receive plan confirmation from the bankruptcy court by June 30, 2020 and PG&E exits bankruptcy soon thereafter with full participation in the wildfire insurance fund established by AB 1054. Failure to receive plan confirmation will result in a redemption of the new debt.

Assignments:

..Issuer: PG&E Corporation

.Corporate Family Rating, Assigned Ba2

.Probability of Default Rating, Assigned Ba3-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.Senior Secured Debt, Assigned B1 (LGD5)

..Issuer: Pacific Gas & Electric Company

.Senior Secured Debt, Assigned Baa3 (LGD2)

.Preferred stock, Assigned B1 (LGD5)

Outlook Actions:

..Issuer: PG&E Corporation

....Outlook, Assigned Stable

..Issuer: Pacific Gas & Electric Company

....Outlook, Assigned Stable

RATINGS RATIONALE

"PG&E's ratings reflects several challenges that lie ahead for the company as it exits its second bankruptcy in the last two decades," said Jeff Cassella, VP-Senior Credit Officer. "These challenges include the substantial task of limiting wildfires in the face of rising wildfire risks largely due to climate change as well as building trust with key stakeholders including state regulators, policymakers and customers," added Cassella.

The Ba2 CFR assigned to PCG considers PG&E's position as a large, fully regulated utility operating solely within the state of California. We view the California political and regulatory environment to be unique and more complicated compared to other state regulatory jurisdictions, in large part due to the California utilities' continuing exposure to wildfire risk, an important ESG consideration and a key driver of the organization's credit quality. While the regulatory framework offers several supportive cost recovery mechanisms, like decoupling, a forward test year and above average rates of return, inverse condemnation risk is unique to California utilities.

The Baa3 rating on PG&E's first mortgage bonds and other secured debt reflects the strong security provided by the first lien on substantially all of the utility's real assets. Upon exit from bankruptcy, PG&E's secured debt will total approximately $33 billion, representing about 50% of the book value of the company's assets and about 75% of rate base. The investment grade rating on the utility's secured debt reflects not only its senior position in the organization's capital structure, but also the substantial security provided by the utility's essential electric and gas transmission, distribution and generation assets.

PCG's ratings incorporate this more onerous political and legislative environment, the continued high degree of exposure to wildfires and the potential for future wildfire costs to be incurred by the utility under inverse condemnation. The possibility for additional wildfire events remains high due to both climate change and population growth in high fire-threat areas. However, the financial impact of future wildfire events should be mitigated by PG&E's participation in California's recently established wildfire insurance fund as well as the new, but untested, regulatory cost recovery framework outlined by AB1054[1], the wildfire bill passed by the state legislature and approved by the Governor in 2019.

AB1054 did not eliminate or alter the application of inverse condemnation, so California utilities are still responsible for paying wildfire victims for wildfire damages, regardless of fault. However, the law improves utility liquidity and enhances their ability to recover wildfire costs from ratepayers by making the prudency standard more favorable and capping the cost disallowance related to wildfire claims to 20% of T&D equity rate base over any three-year period.

Over the next three years, we expect PCG's ratio of cash flow from operations pre-working capital changes (CFO pre-W/C) to debt to be in the 12-15% range and utility PG&E's ratio of CFO pre-W/C to debt to be in the 14-16% range, including planned wildfire claim securitization bonds as on-credit debt. We expect some improvement in the companies' financial profiles through increased cash flow generation and debt reduction, particularly at the parent level. Upon exit, holding company debt will represent about 12% of consolidated debt. However, we expect holdco debt to steadily decline as the company plans to pay down this debt meaningfully over the next five years.

We acknowledge that PCG's credit metrics generally reflect a financial profile that is typically commensurate with a low investment-grade rated utility holding company. However, financial metrics alone are not representative of PCG's overall credit risk profile because of the elevated political risk and legal challenges that continue to persist. These include the company being on probation because of the 2010 San Bruno pipeline explosion, that will continue after the bankruptcy exit, highlighting the company's history of safety and governance issues. In addition, the utility needs to continue to invest heavily in hardening its grid and bolstering its wildfire risk mitigation efforts within its service territory. This will be an ongoing process in the face of climate change and extreme weather events and largely offsets the relatively strong financial metrics.

ESG considerations are a key driver of both PCG and PG&E's ratings and primarily focus on the elevated environmental risk that arises from the organization's significant exposure to wildfires that ultimately lead to its bankruptcy filing last year. PG&E's equipment has been found to be the cause of several major fires over the last few years. The wildfires, which the state of California believes is partly driven by climate change, have added to the state's urgency to combat climate change. Although the state has added significant protection with the aforementioned wildfire insurance fund, the negative financial impact of wildfires could continue to undermine the utility's financial stability and make it more difficult to carry out its decarbonization mandates to combat climate change.

Aside from wildfires, PG&E has moderate carbon transition risk compared to the rest of the US regulated sector due partly to the utility's exit from coal-fired generation many years ago. Additionally, over the long-term, PG&E continues to transition to a pure T&D utility as it self-generates only about half of its electric load with the remaining sourced through purchased power agreements. California's public policy response to climate change issues, which includes aggressive carbon targets and renewable portfolio standards as well as other developments such as community choice aggregators and the growth of rooftop solar, have created additional risk and uncertainty for utilities.

From a generation standpoint, less than 18% of PG&E's 2019 electric load was supplied by owned natural gas power plants. About 43% of its electric load was supplied through power purchase agreements, the majority of which are with renewables and hydro facilities, a positive ESG consideration. The remaining approximately 40% of its electric load was largely self-generated and consisted mostly of nuclear and hydro power.

Our credit analysis of PCG and PG&E also incorporates social risks primarily related to health and safety, demographic and societal trends, as well as customer relations as the company works to provide reliable and affordable service to customers and safe working conditions to employees. Taking into account PG&E's history of safety problems, including the San Bruno pipeline incident, infrastructure linked to wildfire ignitions and the impact of public safety power shutoffs on customers, PG&E has higher social risks compared to the typically moderate social risks experienced by most regulated electric and gas utility peers.

The coronavirus outbreak, weak global economic outlook and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

We expect PG&E to be resilient to recessionary pressures related to the coronavirus because of its rate-regulated business model and regulatory mechanisms such as decoupling revenues. Nevertheless, we are watching for electricity and gas usage declines, utility bill payment delinquency, and the regulatory response to counter these effects on earnings and cash flow. As the events related to the coronavirus continue, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios. We note that California's moratorium on utility disconnections until April 2021 is one of the longest in the US, which could result in PG&E of having higher than average customer bill payment delinquencies compared to peers. The effects of the pandemic could result in financial metrics that are weaker than expected; however, we see these issues as temporary and not reflective of the long-term financial or credit profile of PCG.

As for governance, we consider PCG's management and financial strategy to be in a period of transition and uncertainty as the company exits from bankruptcy and recently added 11 new members to its 14-person Board of Directors while also searching for a permanent CEO as the current CEO is set to retire on June 30, 2020.

Liquidity

PCG's SGL-2 speculative grade liquidity (SGL) rating reflects a good liquidity profile supported by relatively stable cash flow generation and a high degree of availability under external credit facilities. After the bankruptcy exit, we expect PG&E to generate negative free cash flow as capital expenditures remain significant as the utility continues to invest heavily in wildfire mitigation. PCG's liquidity will be bolstered by the company's inability to distribute common stock dividends to shareholders until it achieves a specific earnings target, which we do not expect to occur until 2023.

We project PCG to have about $250 million of cash on the balance sheet upon exit and full access to $4 billion of revolving credit facilities. The credit facilities include PCG's $500 million senior secured (stock pledge only) revolver and PG&E's $3.5 billion senior secured (all asset pledge) revolver, which includes a $1.5 billion letter of credit sublimit. Both facilities three years after the date of emergence, but each has two one-year extension options with lenders approval. If bill payment delinquencies or under-collections continue to rise due to the coronavirus pandemic, we expect the company may need to draw on its revolving credit facilities to cover cash flow shortfalls.

These facilities do not include a material adverse change clause. The PCG credit facility has two financial maintenance covenants including a limit on debt to capitalization of no more than 70% and solely to the extent the credit facility is drawn as of the end of any quarter, a minimum cash coverage ratio of at least 1.5x prior to the date of the first dividend declaration and of at least 1.0x thereafter. The PG&E credit facility only has one financial maintenance covenant which limits the debt to capitalization ratio to no more than 65%.

Outlook

PCG and PG&E's stable outlooks reflect our expectation that the utility will reduce wildfire risks and liabilities in its service territory through its significant wildfire mitigation investments and better maintenance of its infrastructure. The stable outlook also reflects our view that the California regulatory and legislative environment will remain unique and complicated, but ultimately credit supportive of the state's utilities, including the operation of the wildfire insurance fund during the next and future wildfire seasons. The stable outlook also incorporates our expectation that the companies' financial profiles will slowly strengthen through increased cash flow generation and holding company debt reduction.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

Because of the pending changes at the Board and senior management, execution risk related to planned equity issuance, and a lack of a track record after exiting from bankruptcy, an upgrade of PCG or PG&E's ratings is unlikely in the near term. Positive rating momentum could occur if PG&E is successful in its wildfire mitigation investments and is able to reduce both wildfire risk and potential liabilities. At the same time, positive rating momentum could occur as a result of a material strengthening of the organization's financial profile from improved cash flow generation and debt reduction, particularly at the parent.

Factors that could lead to a downgrade

PCG and PG&E's ratings could be downgraded if the company is not successful in reducing wildfire risks in its service territory, wildfire liabilities increase materially as a result of new fires, or if there is a failure by state regulators to successfully implement the provisions of AB 1054, including the liability cap, improved prudency standards and access to the wildfire insurance fund, in a consistent and credit supportive manner. Downward rating pressure could also occur if the companies' financial profiles deteriorate such that PCG's ratio of CFO pre-W/C to debt is sustained below 10% or if PG&E's ratio of CFO pre-W/C to debt is sustained below 13%.

PG&E Corporation is a regulated utility holding company headquartered in San Francisco, California that conducts nearly all of its business through Pacific Gas and Electric Company, a regulated vertically integrated utility serving northern and central California. PG&E is regulated by the California Public Utilities Commission and by the Federal Energy Regulatory Commission. PCG and PG&E are expected to exit from their Chapter 11 bankruptcy filing in July 2020. Upon emergence, PCG's assets are expected to be over $85 billion with total reported debt of approximately $38 billion. PG&E serves approximately 5.4 million electric distribution customers and 4.5 million natural gas customers.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Assembly Bill 1054 - California Legislature website 12-Jul-2019

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeffrey F. Cassella
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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