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Rating Action:

Moody's downgrades Pacific Gas & Electric to Ba3 and PG&E Corp. to B2; assigns Ba3 CFR; ratings remain on review for downgrade

10 Jan 2019

Over $21 billion of rated debt and credit facilities affected

NOTE: On January 11, 2019, the press release was corrected as follows: In the list of Downgrades, under California Infrastructure & Econ. Dev. Bank, added LGD3 assessment for Senior Unsecured Revenue Bonds; under California Pollution Control Financing Auth., added LGD3 assessment for Senior Unsecured Revenue Bonds and Underlying Senior Unsecured Revenue Bonds; under Pacific Gas & Electric Company, added LGD3 assessment for Senior Unsecured Bank Credit Facility, Senior Unsecured Regular Bond/Debenture and Underlying Senior Unsecured Regular Bond/Debenture, and LGD5 assessment for Preferred Stock; under PG&E Corporation, added LGD5 assessment for Senior Unsecured Bank Credit Facility. Revised release follows.

New York, January 10, 2019 -- Moody's Investors Service, (Moody's) downgraded the ratings of Pacific Gas & Electric Company (PG&E or utility), including its senior unsecured rating to Ba3 from Baa2 and its short term rating for commercial paper to Not Prime from Prime-2. Moody's also downgraded PG&E's holding company, PG&E Corporation (PCG or parent), including its senior unsecured rating to B2 from Baa3 and its short term rating for commercial paper to Not Prime from Prime-3. At the same time, Moody's assigned a Ba3 Corporate Family Rating (CFR), a B1-PD Probability of Default rating and an SGL-3 Speculative Grade Liquidity Rating. Ratings of PCG and PG&E remain on review for downgrade.

Downgrades:

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

....Senior Unsecured Revenue Bonds, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

....Underlying Senior Unsecured Revenue Bonds, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

..Issuer: Pacific Gas & Electric Company

.... Issuer Rating, Downgraded to Ba3 from Baa2; Placed Under Review for further Downgrade

....Preferred Stock, Downgraded to B2 (LGD5) from Ba1; Placed Under Review for further Downgrade

....Senior Unsecured Bank Credit Facility, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

....Senior Unsecured Commercial Paper, Downgraded to NP from P-2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

....Underlying Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 (LGD3) from Baa2; Placed Under Review for further Downgrade

....Senior Unsecured Shelf, Downgraded to (P)Ba3 from (P)Baa2; Placed Under Review for further Downgrade

..Issuer: PG&E Corporation

.... Issuer Rating, Downgraded to B2 from Baa3; Placed Under Review for further Downgrade

....Preferred Shelf, Downgraded to (P)Caa1 from (P)Ba2; Placed Under Review for further Downgrade

....Preferred Non-Cumulative Shelf, Downgraded to (P)Caa1 from (P)Ba2; Placed Under Review for further Downgrade

....Subordinate Shelf, Downgraded to (P)B3 from (P)Ba1; Placed Under Review for further Downgrade

....Senior Unsecured Shelf, Downgraded to (P)B2 from (P)Baa3; Placed Under Review for further Downgrade

....Senior Unsecured Bank Credit Facility, Downgraded to B2 (LGD5) from Baa3; Placed Under Review for further Downgrade

....Senior Unsecured Commercial Paper, Downgraded to NP from P-3

Assignments:

..Issuer: PG&E Corporation

.... Probability of Default Rating, Assigned B1-PD; Placed Under Review for further Downgrade

.... Speculative Grade Liquidity Rating, Assigned SGL-3

.... Corporate Family Rating, Assigned Ba3; Placed Under Review for further Downgrade

RATINGS RATIONALE

"We see a much more challenging environment for PG&E, as potential liabilities grow, liquidity reserves decline and access to capital becomes more uncertain," said VP-Senior Credit Officer, Jeff Cassella. "The company is increasingly reliant on extraordinary intervention by legislators and regulators, which may not occur soon enough or be of sufficient magnitude to address these adverse developments." added Cassella.

Over the last two months, since we placed the ratings of both PCG and PG&E on review for downgrade, the company has experienced more negative developments. In December, state legislative leaders publicly aired their concerns about perceived weaknesses in PCG's corporate governance which we believe are influencing the relationship between PG&E and its regulator, the California Public Utility Commission (CPUC). In fact, on 21 December, the CPUC opened a new phase in an existing three-year old investigation into PCG's safety culture. Possible outcomes from the investigation include changes to the Board of Directors and senior management, a corporate restructuring, and possibly reconstituting the ownership structure into a non-profit utility enterprise.

In addition, on 13 December, the CPUC opened another investigation as to whether PG&E violated the state's natural gas safety rules. The CPUC's order followed the recent investigation report by the CPUC Safety and Enforcement Division (SED) staff, which alleges that PG&E falsified records from 2012 to 2017. Financial penalties could result. These alleged violations are a material credit negative for PG&E because, if found to be true, this could be a sign of a systemic weakness at PG&E with respect to corporate governance and oversight policies. The new allegations about natural gas safety violations also are arising right after PG&E filed its 2020 general rate case, in which the utility is requesting a revenue increase of about $1.1 billion.

The review for downgrade will continue to look for signs of 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) and the CPUC. The review for downgrade will also focus on the potentially burgeoning liabilities facing the utility, the criteria and methodology being developed to calculate the financial stress test (CPUC hearings begin today), the likelihood and timing of any securitization financing to finance the potential 2017 wildfire liabilities, as well as uncertainty about whether securitization financing will be allowed to address the potential 2018 wildfire liabilities. The review could result in a multi-notch downgrade of the ratings of both PCG and PG&E.

Moody's notes that PG&E, which has a capital structure comprised of only unsecured debt, can issue secured debt, assuming authorization from the CPUC and the utility has access to the capital markets.

The Ba3 CFR incorporates a view that the potential liability associated with the 2017 and 2018 wildfires is at least $15 billion, and resulting pressure on the balance sheet and liquidity. The rating also considers the risks associated with facing additional wildfire liabilities given the likelihood of future wildfires in the utility's service territory and California's unusually strict liability law known as inverse condemnation.

Moody's views the California regulatory environment as more 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 due to climate change and increased population in fire-prone areas. These risks are only partially mitigated by the new and untested regulatory cost recovery framework outlined by SB 901. The rating 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.

PCG and PG&E's SGL-3 speculative grade liquidity ratings consider relatively stable cash flow generation. Currently, Moody's estimates an aggregate cash balance of roughly $2 billion. We estimate that about $800 million might be consumed by the need to post collateral for payment obligations. PG&E and PCG have fully drawn their respective revolving credit facilities, with aggregate borrowings outstanding of $3 billion and $300 million, respectively. No additional amounts are available and both facilities expire in April 2022. These facilities do not include a material adverse change clause but have a financial covenant limiting the debt to total capitalization ratio to no more than 65%. Both companies were in compliance with this financial covenant as of 30 September 2018. However, we think there is a high likelihood of substantial charges being taken for wildfire liabilities, which could materially impact its financial covenant cushion.

Upcoming maturities in the near-to-intermediate term include PG&E's $250 million term loan due in February 2019, as well as the parent's $350 million term loan due April 2020, which also includes an option for a one-year extension. In addition, we estimate that PG&E may be required to post as much as $800 million more in collateral because the utility's rating dropped below investment grade.

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 - 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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