New York, March 19, 2018 -- Moody's Investors Service (Moody's) downgraded the ratings of Pacific
Gas & Electric Company (PG&E), and its parent company,
PG&E Corporation (PCG or Corp). PG&E's issuer and
senior unsecured ratings were downgraded to A3 from A2, preferred
stock to Baa2 from Baa1, and short-term commercial paper
rating to P-2 from P-1, and PCG's issuer and
senior unsecured ratings to Baa1 from A3, subordinated shelf to
(P)Baa2 from (P)Baa1, and preferred shelf to (P)Baa3 from (P)Baa2.
PCG's short-term commercial paper rating is confirmed at
P-2. The rating outlooks for both companies are negative.
This concludes the review initiated on 21 December 2017, which was
prompted by Corp's Board of Directors' (BOD) decision to suspend
the cash dividends on PCG's common stock and the utility's preferred stock
owing to the rising potential for significant liabilities related to the
October 2017 Northern California wildfires.
Downgrades:
..Issuer: California Infrastructure & Econ.
Dev. Bank
....Senior Unsecured Revenue Bonds,
Downgraded to A3 from A2
..Issuer: California Pollution Control Financing Auth.
....Senior Unsecured Revenue Bonds,
Downgraded to A3 from A2
....Underlying Senior Unsecured Revenue Bonds,
Downgraded to A3 from A2
..Issuer: Pacific Gas & Electric Company
.... Issuer Rating, Downgraded to A3
from A2
....Pref. Stock Preferred Stock,
Downgraded to Baa2 from Baa1
....Senior Unsecured Bank Credit Facility,
Downgraded to A3 from A2
....Senior Unsecured Commercial Paper,
Downgraded to P-2 from P-1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to P-2 from P-1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2
....Underlying Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2
....Senior Unsecured Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: PG&E Corporation
.... Issuer Rating, Downgraded to Baa1
from A3
....Senior Unsecured Shelf, Downgraded
to (P)Baa1 from (P)A3
....Preferred Shelf, Downgraded to (P)Baa3
from (P)Baa2
....Preferred Shelf Non Cumulative,
Downgraded to (P)Baa3 from (P)Baa2
....Subordinate Shelf, Downgraded to
(P)Baa2 from (P)Baa1
....Senior Unsecured Bank Credit Facility,
Downgraded to Baa1 from A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
Outlook Actions:
..Issuer: Pacific Gas & Electric Company
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: PG&E Corporation
....Outlook, Changed To Negative From
Rating Under Review
Confirmations:
..Issuer: PG&E Corporation
....Senior Unsecured Commercial Paper,
Confirmed at P-2
RATINGS RATIONALE
"The rating downgrade recognizes that final causes of the Northern
California wildfires have yet to be determined, potentially exposing
PCG to material contingent, off-balance sheet liabilities.
Furthermore, the likelihood and timing around revising the application
of inverse condemnation are unclear," said Jeff Cassella,
Vice President - Senior Analyst. "Long-term
climate change risks like droughts and wildfires are manifesting faster
than regulators and legislators can react to protect PCG from exposure"
If PG&E is found liable for any portion of the northern California
wildfires, there is a high degree of uncertainty as to how wildfire
related costs and liabilities would be recovered from ratepayers.
These contingent, off balance sheet liabilities could lead to a
material deterioration in PCG and/or PG&E's financial profile
and affect access to capital markets. Despite the suspension of
shareholder dividends, which bolsters liquidity and strengthens
the balance sheet for both PCG and PG&E, the uncertainty associated
with the wildfire-related damages, especially those related
to the application of inverse condemnation, has increased PCG and
PG&E's risk profile.
Moody's incorporates a view that the regulatory environment in California
has become more politically charged as state regulators and legislators
look to each other to implement changes around laws and regulatory proceedings
involving the application of inverse condemnation while simultaneously
balancing the potential impact on investor-owned utilities and
ratepayers. As events become more politicized, we believe
the likelihood of constructive changes becomes more challenging.
That said, Moody's acknowledges recent pronouncements from
the governor's office to address these issues are credit positive.
This is consistent with Moody's expectation that state regulators
will look to ensure PG&E and other utilities remain financially healthy
to help the state meet its ambitious renewable targets and other public
policy goals. Nonetheless, events over the past few months
have led us to conclude that the California regulatory and legislative
environments are not as credit supportive as we historically thought.
PCG's Baa1 rating reflects the stable earnings and cash flows generated
from the authorized rate base of its principal operating subsidiary,
PG&E, a regulated vertically-integrated electric utility
in California. The Baa1 rating incorporates a view that the potential
liability associated with the wildfires could be as much as $10
billion, and that any financing associated with funding the liability
would occur at PCG, not PG&E.
PCG's senior unsecured debt is rated one notch lower than PG&E because
PCG's modest amount of parent company debt is structurally subordinated
to the unsecured debt at the utility subsidiary. PCG's credit profile
is essentially the same as that of PG&E, given that the parent
has no other material businesses and only about $350 million of
holding company debt compared with $17.8 billion of long-term
debt as of 31 December 2017 at the utility.
PG&E's rating reflects the company's modest debt leverage, strong
financial metrics, and a regulatory environment that has been historically
credit supportive including providing above average rates of return.
The rating incorporates the state's demanding public policy goals and
an elevated level of political risk, especially given the company's
history of safety and governance issues as well as potential substantial
exposure to rising climate change related liabilities, such as wildfires.
PG&E's short-term commercial paper rating was downgraded
to Prime-2 from Prime-1 to reflect the uncertainty of the
potential liability associated with wildfire-related damages that
could be so extensive that it may exceed liquidity reserves and may impact
the company's ability to access the capital markets. PCG and PG&E's
Prime-2 short-term commercial paper rating reflects sufficient
liquidity to cover ordinary operating expenses supported by strong and
stable cash flow generation and external liquidity sources of $3.3
billion of committed credit facilities ($300 million at Corp.
and $3 billion at PG&E), of which $3.1
billion was available at 31 December 2017. The facilities are not
subject to a MAC representation but require a debt to total capitalization
ratio of no more than 65%. Both companies had substantial
headroom under this covenant as of December 2017 (50% at Corp.
and 49% at PG&E).
Rating Outlook
The negative outlook reflects that wildfire-related matters may
not be resolved for several months, if not years, and that
the likelihood of additional wildfires or other climate change related
natural disasters could occur before the current inverse condemnation
risks are resolved by the legislators. The negative outlook on
PCG and PG&E's also reflects the legislative challenges and
heightened regulatory contentiousness that PG&E is likely to encounter
as the company seeks to insulate itself from potential wildfire-related
liabilities. To the extent there is evidence of additional financial
stress or adverse political or regulatory developments, PCG and
PG&E's ratings could be affected.
Factors That Could Lead to an Upgrade
An upgrade of PCG and PG&E's ratings are unlikely while the current
legislative and regulatory environment exposes the companies to essentially
uncapped liabilities related to wildfires under the application of inverse
condemnation. The rating outlook could be stabilized if there are
substantial legislative changes to the application of inverse condemnation
reducing the exposure to the utility, where PG&E is currently
held accountable for wildfire related damages even when the utility's
equipment was not at fault. Similarly, the outlook could
be stabilized if there is clear visibility on the regulatory front where
utilities are able to recover wildfire related costs liable under inverse
condemnation from ratepayers. An upgrade would also be predicated
on financial metrics sustained at levels commensurate with mid-A
ratings, including PCG's ratio of CFO pre-working capital
to debt in the mid-20% range.
Factors That Could Lead to a Downgrade
A downgrade of PCG and PG&E's ratings could occur if clarity
around cost recovery related to wildfire damages under inverse condemnation
does not occur or if the regulatory environment becomes less credit supportive
or appears more contentious. Additionally, a downgrade could
occur if the potential liability related to the recent northern California
wildfires, without visibility to cost recovery from ratepayers,
results in a deterioration of financial metrics such that PCG's
ratio of CFO pre-working capital to debt declines below the high-teen's
range on a sustained basis. A weakening of the credit profile at
PG&E would also impact the credit profile of PCG.
PG&E Corporation is a utility holding company headquartered in San
Francisco, California that conducts nearly all of its business through
Pacific Gas and Electric Company, a vertically integrated utility
serving northern and central California. At December 2017,
PG&E's assets of around $68 billion represented 99%
of PCG's consolidated assets and total reported debt was approximately
$19.1 billion. PG&E serves approximately 5.4
million electric distribution customers and 4.3 million natural
gas customers. PG&E is regulated by the California Public Utilities
Commission (CPUC) and by the Federal Energy Regulatory Commission (FERC).
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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..
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
Vice President - Senior Analyst
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
Jim Hempstead
MD - Utilities
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
