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Rating Action:

Moody's upgrades PG&E Corporation and Pacific Gas & Electric; outlook revised to stable

25 Jul 2017

New York, July 25, 2017 -- Moody's Investors Service, ("Moody's") today upgraded PG&E Corporation's (PCG) senior unsecured rating to A3 from Baa1.The senior unsecured rating at Pacific Gas & Electric Company (PG&E), PCG's principal utility operating subsidiary, was upgraded to A2 from A3. PG&E's commercial paper rating was also upgraded to Prime-1 (P-1) from Prime-2 (P-2). The outlook on both companies was revised to stable from positive. See below for the full list of ratings and rating actions.

Upgrades:

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

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

....Backed Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: California Pollution Control Financing Auth.

....Backed Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

....Underlying Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Pacific Gas & Electric Company

.... Issuer Rating, Upgraded to A2 from A3

....Pref. Stock Preferred Stock, Upgraded to Baa1 from Baa2

....Senior Unsecured Bank Credit Facility, Upgraded to A2 from A3

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

....Senior Unsecured Regular Bond/Debenture, Upgraded to P-1 from P-2

....Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

....Underlying Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

....Senior Unsecured Shelf, Upgraded to (P)A2 from (P)A3

..Issuer: PG&E Corporation

.... Issuer Rating, Upgraded to A3 from Baa1

....Senior Unsecured Shelf, Upgraded to (P)A3 from (P)Baa1

....Preferred Shelf, Upgraded to (P)Baa2 from (P)Baa3

....Subordinate Shelf, Upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Bank Credit Facility, Upgraded to A3 from Baa1

....Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1

Outlook Actions:

..Issuer: Pacific Gas & Electric Company

....Outlook, Changed To Stable From Positive

..Issuer: PG&E Corporation

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: PG&E Corporation

....Senior Unsecured Commercial Paper, Affirmed P-2

RATINGS RATIONALE

"PG&E has resolved the principal legal claims related to the San Bruno pipeline explosion and other incidents while maintaining a strong financial profile" said Swami Venkataraman, Senior Vice President. "California provides a strong regulatory framework with a broad suite of cost recovery mechanisms that provides good transparency into PG&E's cash flows."

Over the last several years, PG&E has incurred costs exceeding $4 billion related to the San Bruno pipeline explosion. The company has financed all these costs with equity, which has allowed it to continue to maintain its strong financial profile. The rating upgrade incorporates the fact that lawsuits and investigations related to San Bruno have been settled or resolved and a settlement reached with key parties on the issue of ex parte communications is pending approval by the California Public Utilities Commission (CPUC).

The lawsuits related to the Butte fire constitute the last significant issue yet to be resolved. The company has taken a charge on its books for $750 million (the low end of the company's expectation for damages) and is seeking recovery of those costs through insurance. If costs exceed insurance coverage, PG&E could file with the CPUC for recovery from ratepayers.

The ratings upgrade also reflects California's credit supportive regulatory framework, the company's modest debt leverage and a robust financial performance, balanced by demanding public policy goals and an elevated level of political risk, especially given the company's history of safety and governance issues. After several years with multiple safety and governance issues, PG&E has been free of any major incidents for the past eighteen months. PCG is rated one notch lower than PG&E because PCG's modest amount of parent company debt is structurally subordinated to debt at the utility.

Regulated utilities operating in California benefit from a strong regulatory framework with a broad suite of cost recovery mechanisms, including decoupling mechanisms and a forward test year with scheduled future rate increases. However, California also has a higher degree of political risk than most other jurisdictions in the US. The California Public Utilities Commission (CPUC) places a heavy demand on the utilities to carry out public policy goals and initiatives, such as reaching a 50% renewable portfolio standard by 2030. Many other ongoing policy initiatives such as storage mandates, electric vehicle infrastructure and community choice aggregation make it more challenging to maintain a consistently high level of reliability. These policy goals creates a higher level of media attention and scrutiny and issues can quickly become contentious and litigious.

On July 13, 2017, the CPUC voted to extend the deadline for CA investor owned utilities to file their cost of capital application by two years to April 22, 2019, based on a 2020 test year. Beginning in January 2018, it reduces PG&E's ROE to 10.25%, from 10.4%, maintaining the equity layer at 52%. We view the cost of capital decision as a positive development for PG&E because it will preserve its healthy ROEs and provide cash flow certainty for two more years, more than offsetting the effects of lower ROEs. On May 12, 2017, the CPUC voted on the final decision of PG&E's 2017 General Rate Case (GRC), authorizing a 1.1% revenue requirement increase to $7.9 billion.

PCG and PG&E are both modestly leveraged and their financial risk profiles are supportive of their ratings. PCG and PG&E both have cash flow from operation pre-working capital to debt (CFO Pre-WC/debt) well in excess of 20% over the past few years. Going forward, we expect PCG and PG&E's key credit metrics to remain steady in the mid-twenty percent range.

Liquidity

PCG and PG&E have comfortable liquidity, as indicated by their commercial paper ratings of P-2 and P-1, respectively. The companies have access to adequate liquidity sources with $3.3 billion of committed credit facilities ($300 million at PCG and $3 billion at PG&E), of which about $3.0 billion was available as of 1Q17. These 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 March 2017 (50% and 49%, at PCG and PG&E, respectively). As of 1Q17, PG&E reported $800 million of short-term debt outstanding.

Due to unrecoverable costs related to San Bruno and other sizable capital expenditures, PG&E's free cash flow was negative by about $1.8 billion in the last twelve months ending March 31, 2017. We expect free cash flow to be negative again in 2017 in the range of $1.0 to $1.5 billion. PCG will mainly rely on the capital markets to fund this deficit, though we expect the company to have ready access to the capital markets.

Rating Outlook

The stable outlook reflects our expectations for stable cash flows at PG&E while maintaining a healthy and constructive relationship with the CPUC. We expect the company to maintain a ratio of CFO Pre-W/C to Debt mid-twenties percent over the next few years. The stable outlook also reflects the company's continued commitment to fund unrecoverable costs and penalties with equity.

What Could Change the Rating - Up

A positive action at PCG and PG&E could result if the company maintained a significantly stronger financial profile, such as a ratio of CFO Pre-W/C to debt in excess of 30% on a sustained basis.

What Could Change the Rating - Down

We could revise the outlook to negative should there be new safety or governance related incidents that result in investigations and penalties or if the regulatory environment in CA were to turn unfavorable from a credit perspective. We may also take a negative credit action should the company's CFO Pre-W/C to debt falls below 20% on a sustained basis.

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.

Swami Venkataraman, CFA
Senior Vice President
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

No Related Data.
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