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
