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Rating Action:

Moody's downgrades PG&E to Baa3 and Pacific Gas & Electric to Baa2; ratings on review for downgrade

15 Nov 2018

Approximately $18 billion of rated debt affected

New York, November 15, 2018 -- Moody's Investors Service, (Moody's) downgraded the ratings of PG&E Corporation (PCG or parent) including its senior unsecured rating to Baa3 from Baa2 and its short term rating for commercial paper to Prime-3 from Prime-2. Moody's also downgraded the long-term ratings of PCG's principal utility subsidiary, Pacific Gas & Electric Company (PG&E or utility), including its senior unsecured rating to Baa2 from Baa1. All of the ratings of PCG and PG&E are on review for downgrade, including PCG's Prime-3 and PG&E's Prime-2 short term rating for commercial paper. The review could result in a multi-notch downgrade of both PCG and PG&E's ratings.

Downgrades:

..Issuer: California Infrastructure & Econ. Dev. Bank

....Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

....Underlying Senior Unsecured Revenue Bonds, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

..Issuer: Pacific Gas & Electric Company

....Issuer Rating, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

....Preferred Stock, Downgraded to Ba1 from Baa3; Placed Under Review for further Downgrade

....Senior Unsecured Bank Credit Facility, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

.... Underlying Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review for further Downgrade

..Issuer: PG&E Corporation

.... Issuer Rating, Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade

....Preferred Shelf, Downgraded to (P)Ba2 from (P)Ba1; Placed Under Review for further Downgrade

....Preferred Non-Cumulative Shelf, Downgraded to (P)Ba2 from (P)Ba1; Placed Under Review for further Downgrade

....Subordinate Shelf, Downgraded to (P)Ba1 from (P)Baa3; Placed Under Review for further Downgrade

....Senior Unsecured Shelf, Downgraded to (P)Baa3 from (P)Baa2; Placed Under Review for further Downgrade

....Senior Unsecured Commercial Paper, Downgraded to P-3 from P-2; Placed Under Review for further Downgrade

....Senior Unsecured Bank Credit Facilities, Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade

On Review for Downgrade:

..Issuer: Pacific Gas & Electric Company

....Senior Unsecured Commercial Paper, Placed on Review for Downgrade, currently P-2

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently P-2

Outlook Actions:

..Issuer: Pacific Gas & Electric Company

....Outlook, Changed To Rating Under Review From Negative

..Issuer: PG&E Corporation

....Outlook, Changed To Rating Under Review From Negative

RATINGS RATIONALE

"The rating downgrade reflects the material exposure to new potential liabilities associated with the Camp fire and the uncertainties associated with how the fire-related liabilities will be recovered," said VP-Senior Credit Officer, Jeff Cassella. "The 2018 wildfires are not covered under the recently passed California legislation SB 901, an omission that will now have more serious credit implications for the company".

On 13 November 2018, PG&E took the unusual step of completely drawing down $3.3 billion of their bank revolving credit facilities, including a $3 billion credit facility at PG&E and a $0.3 billion credit facility at the parent. Both facilities expire in April 2022. The decision is viewed as a prudent action by management to ensure sufficient liquidity to manage funding needs over the near-to-intermediate term. That said, drawing the credit facilities also signals a concern regarding access to the capital markets, a material credit negative and is unusual for an investment grade regulated utility.

The revolver drawdowns brings PCG and PG&E's aggregate cash balance to approximately $3.5 billion. This is sufficient to cover, at least, upcoming maturities in the near-to-intermediate term including PG&E's $500 million in floating rate notes due November 2018, the $45 million pollution control bonds due December 2018, a $250 million term loan due in February 2019, as well as the parent's $350 million term loan due April 2020. In addition, we estimate that PG&E may be required to post as much as $800 million more in collateral in the event their rating falls below investment grade.

The company's action suggests that the potential liabilities associated with the current Camp fire, on top of the 2017 wildfires, may be extensive. Although the extent of this exposure is not known at this time, if PG&E is held accountable for the Camp fire under California's strict liability law known as inverse condemnation, we expect the liabilities will more than likely exceed the company's liquidity reserves and may impact the company's ability to access the capital markets for a temporary period of time.

At this time, Moody's does not incorporate a view that a strategic bankruptcy filing is imminent because it is too early to determine if PG&E's equipment will be found to be the substantial cause of the Camp fire. However, considering that the recently enacted Senate Bill (SB) 901 has mitigated liabilities associated with the 2017 California wildfires, it does not address recovery for any potential liabilities related to wildfires that occur in 2018. The gap in coverage within SB 901 is a material credit negative, particularly considering the magnitude of the Camp Fire.

Moody's incorporates a view that the state's regulators and legislators will continue to support the financial health of the state's utilities in order to protect customers from higher rates while still meeting California's ambitious renewable targets and other public policy goals. With that said, the review will look for signs of additional legislative and regulatory support for PG&E as the company works through the various investigative, legal and regulatory processes with the California Department of Forestry and Fire Protection (CAL FIRE), California Public Utility Commission (CPUC), etc.

The review for downgrade will also focus on the cause and ultimate cost of the Camp fire, the impact on the companies' liquidity capacity including their potential access to the capital markets, the supportiveness of the regulators, and actions by the board of directors and risks associated with changes in public opinion or political intervention in the utility regulatory environment. The developments associated with the CAL FIRE investigations on all fires, most notably Tubbs and Camp, and any signs of additional increases to the already sizeable contingent, off balance sheet liabilities that exist will also be key elements of the review, although definitive resolution may be beyond the timing associated with the review period. The review is expected to be concluded within 60-90 days.

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 about $18 billion of long-term debt at the utility.

PCG's rating incorporates a view that the potential liability associated with the 2017 wildfires is roughly $10 billion, and that funding of the liability would include a mix of new parent equity issuances and utility securitization bonds as allowed by the CPUC under SB901. For now, PCG's rating also incorporates a view that the majority of the capped exposure determined by the financial stress test borne by PCG's shareholders will be financed with new equity rather than holding company debt. The Camp fire adds a significant degree of uncertainty to these assumptions, particularly considering the substantial decline in PCG's equity price over the last week.

PG&E's rating already reflects the substantial exposure related to the 2017 Northern California wildfires that is somewhat mitigated by SB 901, in addition to the new potential exposure relating to the Camp fire. The company's currently modest debt leverage and strong financial metrics supports the credit profile, even though the financial profile is expected to gradually decline over the next few years. The expected decline in financial ratios is primarily due to an increase in short-term borrowings and securitization debt used to fund wildfire related costs. Moody's calculates PG&E's ratio of cash flow from operations pre-working capital (CFO pre-W/C) to debt will decline at least to the high teens range from the mid-20% range currently.

The rating also reflects a regulatory environment that is unique compared to other state regulatory jurisdictions. The CPUC had been historically credit supportive, and provided access to extensive recovery mechanisms, including decoupling and a forward test year as well as above average rates of return. These recovery provisions are expected to remain, but the rating now incorporates a more onerous legislative environment due to the continued exposure related to potential future wildfire costs under inverse condemnation. The potential for these future risks to occur is high, and the credit profile acknowledges that the risks are somewhat mitigated by a new and untested regulatory cost recovery framework outlined by SB 901. The credit also factors in 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.

Liquidity

PCG's Prime-3 short term commercial paper rating and PG&E's Prime-2 short term commercial paper rating are both on review for downgrade. Currently, PCG and PG&E have aggregate borrowings outstanding under their respective revolving credit facilities of $3 billion and $300 million, respectively. PG&E's aggregate borrowings under its revolving credit facility includes $2.85 billion of revolving credit loans, approximately $105 million of letters of credit outstanding, and $10 million of commercial paper. No additional amounts are available under their respective revolving credit facilities. At 13 November 2018, PCG and PG&E's balance of cash and cash equivalents was approximately $356 million and $3.1 billion, respectively. Both facilities expire in April 2022.

In the third quarter of 2018, the parent and utility renewed their liability insurance coverage for wildfire events in an aggregate amount of approximately $1.4 billion for the period from 1 August 2018 through 31 July 2019.

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 30 September 2018, PG&E's assets of around $70 billion represented 99% of PCG's consolidated assets and total reported debt was approximately $18.3 billion. PG&E serves approximately 5.4 million electric distribution customers and 4.5 million natural gas customers. PG&E is regulated by the California Public Utilities Commission and by the Federal Energy Regulatory Commission.

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
VP - Sr 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.
© 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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