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Rating Action:

Moody's downgrades Pacific Gas & Electric to Caa3 and PG&E Corp. to C; outlook is negative

14 Jan 2019

New York, January 14, 2019 -- Moody's Investors Service, (Moody's) downgraded the ratings of Pacific Gas & Electric Company (PG&E or utility) and its holding company, PG&E Corporation (PCG or parent), including the Corporate Family Rating (CFR) to Caa3 from Ba3 and Probability of Default Rating to Ca-PD from B1-PD. Moody's also downgraded PG&E's senior unsecured rating to Caa3 from Ba3, PCG's senior unsecured rating to C from B2 and the Speculative Grade Liquidity Rating to SGL-4 from SGL-3. The rating outlook is negative. This rating action concludes the review for downgrade initiated on November 15, 2018.

Downgrades:

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

....Senior Unsecured Revenue Bonds, Downgraded to Caa3(LGD3) from Ba3(LGD3)

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Downgraded to Caa3(LGD3) from Ba3(LGD3)

....Underlying Senior Unsecured Revenue Bonds, Downgraded to Caa3(LGD3) from Ba3(LGD3)

..Issuer: Pacific Gas & Electric Company

.... Issuer Rating, Downgraded to Caa3 from Ba3

....Pref. Stock, Downgraded to Ca(LGD5) from B2(LGD5)

....Senior Unsecured Bank Credit Facility, Downgraded to Caa3(LGD3) from Ba3(LGD3)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3(LGD3) from Ba3(LGD3)

....Underlying Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3(LGD3) from Ba3(LGD3)

....Senior Unsecured Shelf, Downgraded to (P)Caa3 from (P)Ba3

..Issuer: PG&E Corporation

.... Issuer Rating, Downgraded to C from B2

.... Probability of Default Rating, Downgraded to Ca-PD from B1-PD

.... Corporate Family Rating, Downgraded to Caa3 from Ba3

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

.... Subordinate Shelf, Downgraded to (P)C from (P)B3

.... Senior Unsecured Shelf, Downgraded to (P)C from (P)B2

.... Pref. Shelf, Downgraded to (P)C from (P)Caa1

.... Pref. Non-Cumulative Shelf, Downgraded to (P)C from (P)Caa1

.... Senior Unsecured Bank Credit Facility, Downgraded to C(LGD5) from B2(LGD5)

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

RATINGS RATIONALE

"The rating downgrade is prompted by the very high likelihood of a bankruptcy filing by PG&E and its parent company following the announcement today that they expect to make such a filing on or about 29 January," said VP-Senior Credit Officer, Jeff Cassella. "Management has indicated that they believe the Chapter 11 process is the only viable option to resolve potentially substantial wildfire liabilities, rebuild and invest in its existing system, and maintain access to sufficient financial and liquidity sources," added Cassella.

The Caa3 CFR reflects the company's declining financial position and increasingly limited flexibility as wildfire liabilities mount, collateral posting is required, and higher investments in wildfire safety and prevention are mandated. The rating incorporates the company's view that potential liabilities stemming from the 2017 and 2018 northern California wildfires will be extensive. The rating factors in a legislative and regulatory environment that has become so challenging that management believes it is unlikely that the wildfire exposure will be addressed in a manner that is timely enough to support the financial stability of the company.

The ratings consider that ultimate recovery for the company's unsecured creditors is highly uncertain, owing to the unknown and potentially significant liabilities the company may potentially be held accountable for because of its role in the wildfires. In addition, there is a lack of clarity on the actual size of the total claims for property damages, legal fees and any other punitive damages. The company's total wildfire exposure may take several years to determine and may impact recovery for debtholders. Moody's expects to withdraw all debt ratings immediately following any bankruptcy filing.

After a comprehensive review by both boards of directors with the help of outside advisors, PG&E and its parent have determined that reorganization under a Chapter 11 bankruptcy filing is necessary and is in the best interest of stakeholders, including wildfire claimants. The company is seeking protection from potentially extensive liabilities stemming from the 2017 and 2018 northern California wildfires. Among other things, PG&E expects the Chapter 11 process will allow for an orderly and fair process to resolve these wildfire liabilities and assure PG&E has access to financial resources necessary to continuously invest in its infrastructure including wildfire safety and prevention. Under SB 901, effective 1 January 2019, the Public Utilities Code Section 854.2(d) requires that prior to a "change of control" of a utility, which includes bankruptcy protection, the utility is required to give at least 15 days' advance notice to employees.

In its announcement today, management indicated that it believes that the company could access the capital markets and raise capital through the issuance of secured debt, using the utility's assets to secure additional funding and extend its liquidity for an extended period of time. However, PCG and PG&E's boards of directors concluded that issuing secured debt outside of a restructuring under Chapter 11 would not address the fundamental issues and challenges that the company faces.

The company estimates that if the utility were to be found liable for certain or all of the costs and penalties related to the 2017 and 2018 wildfires, the amount of such liability could exceed $30 billion, which does not include potential punitive damages. This estimate does include the approximately $17 billion of insurance claims for property losses made to date related to the wildfires.

PCG and PG&E's SGL-4 speculative grade liquidity ratings consider the company's weak liquidity position, including its still sizable but declining cash balance. As of 11 January 2019, the company reported an aggregate cash balance of $1.5 billion, of which we estimate that up to $800 million might be consumed by the need to post collateral for payment obligations due to its ratings dropping below investment grade. PG&E and PCG had fully drawn their revolving credit facilities, with aggregate borrowings outstanding of roughly $3 billion and $300 million, respectively, except for approximately $35 million of aggregate availability due to the retirement of certain letters of credit. 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 their financial covenant cushion.

PG&E announced that it does not intend to make the interest payment of approximately $21.6 million due on 15 January with respect to its 2040 Notes. It has a 30-day grace period to make the interest payment before triggering an event of default. 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 has engaged its lenders to secure approximately $5.5 billion of debtor-in-possession (DIP) financing at the time that it files for relief under Chapter 11. The company has received highly confident letters from a number of major banks.

Moody's expects the company will find it challenging to conduct its normal operating activities during the two weeks leading up to the eventual bankruptcy filing. However, PG&E expects that it has sufficient cash available to continue providing service to its customers during this time and until the DIP financing becomes available.

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.
© 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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