Fitch Assigns 'A-' Issuer Default Rating to PCG; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an Issuer Default Rating (IDR) of 'A-' to PG&E Corporation (PCG). At the same time, Fitch has affirmed the IDR of PCG's core operating utility subsidiary Pacific Gas and Electric Company (PG&E) at 'A-'.

Fitch assigns the following ratings to PCG:

--Senior unsecured notes 'A-';

--Unsecured bank facility 'A-';

--Short-term IDR 'F1'.

In addition, Fitch has affirmed PG&E's ratings as follows:

--Senior unsecured notes at 'A';

--Unsecured bank facilities at 'A';

--Preferred stock at 'BBB+';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

The Rating Outlook for PCG and PG&E is Stable. Approximately $10.5 billion of long-term debt is affected by the rating action.

PCG and PG&E's ratings and Stable Outlooks consider the core operating utility's strong, relatively predictable earnings and cash flows, manageable debt levels and the balanced regulatory/political environment in California. The ratings and Outlook also reflect Fitch's confidence in PG&E's ability to effectively execute, finance and recover its large, projected capital spending budget which is expected to average $3.6 billion - $4.9 billion per annum in 2010 and 2011, based on low- and high-case forecasts. The level of PG&E capital investment will be determined largely by the California Public Utilities Commission (CPUC) in a number of pending single-issue rate case decisions in filings seeking approval of renewable and enhanced electric distribution reliability projects.

The ratings and Outlook also assume that regulatory mechanisms will continue to facilitate timely collection of power supply and other costs and a reasonable return on investment. These mechanisms include forward-looking test year and post-test-year attrition rate increases in regularly scheduled general rate case proceedings (GRC), decoupling of electric and gas rates from sales volume, pre-approval of construction spending via GRC and single-issue filings and regulatory balancing accounts. These regulatory practices minimize earnings attrition, providing the utility with a reasonable opportunity to earn its authorized return-on-equity (ROE) and ameliorate concerns regarding recovery of planned infrastructure investment and other expenses.

The ratings also assume that management will fund its large investment program (discussed further below) with a balanced mix of debt and equity consistent with its current capital structure and regulatory requirements. Upward pressure on PG&E's above-average rates could trigger regulatory fatigue or political backlash in the long term, but high rates are mitigated by relatively low monthly customer bills as the result of the mild regional climate.

PG&E filed its 2011 GRC with the CPUC requesting a $1.1 billion (6.4%) revenue increase effective Jan. 1, 2011. The GRC incorporates the utility's CPUC-authorized 11.35% ROE and 52% equity ratio determined in its last cost of capital proceeding. The GRC filing also seeks attrition rate increases of $275 million and $343 million in 2012 and 2013, respectively. The rate increase seeks to recover PG&E's infrastructure, reliability, smart meter and renewable and conventional generation investment planned for 2011-2013.

On May 5, 2010, the CPUC's Division of Ratepayer Advocate (DRA) filed testimony recommending a $227 million rate increase and attrition rate increases of $116 million in 2012 and $107 million in 2013.

In addition to the 6% rate increase, the 2011 GRC filing requests that the CPUC adopt new flexible cost recovery mechanisms by establishing balancing accounts for several categories of costs, including new customer connections, uncollectible accounts and employee healthcare costs.

An administrative law judge proposed decision in the GRC is expected to be issued in the fourth quarter of 2010 and a final CPUC decision around year-end. Rates are expected to be effective Jan. 1, 2011.

In addition, PG&E has filed an all-party settlement agreement of its pending transmission owner rate case with the Federal Energy Regulatory Commission (FERC) and a decision is expected in the second half of 2010. Finally on the regulatory front, PG&E has requested a $67 million rate increase in its pending 2011 gas transmission and storage rate case. A final FERC decision is expected around year-end 2010.

Fitch notes that two CPUC commissioners are termed-out and will leave the commission at the end of this year and a third, appointed by Gov. Schwarzenegger in January 2010, has yet to be confirmed by the state senate. In addition, 2010 is a gubernatorial election year in California, featuring a race between former California governor Jerry Brown (D) and former eBay CEO Meg Whitman (R); the new governor is expected to appoint replacements for the term-limited commissioners. Notwithstanding these uncertainties, Fitch does not believe coming changes at the state capitol or the CPUC will result in meaningful change in energy policy or the balanced regulatory compact in the state.

Capital expenditures in 2009 of $3.9 billion at PG&E were 9% higher than the $3.6 billion invested in 2008 and 43% above 2007 levels. Fitch expects PCG's capex to remain high in 2010 and 2011, ranging from $4 billion-$4.6 billion in 2010 and $3.2 billion-$5.3 billion in 2011. Infrastructure investment, composed of electric and natural gas distribution and transmission and conventional generation, accounts for the vast majority of planned capex (approximately 75%-90%), with the remainder targeting smart meter, renewable generation (wind and solar) and distribution reliability enhancement projects (above levels targeted in PG&E's pending GRC).

PG&E's liquidity position is strong and the utility demonstrated its ability to access capital markets during the height of the credit crisis, issuing $600 million of 8.25% coupon 10-year senior unsecured notes in October 2008. After amending its credit agreement to remove Lehman Bank as a lender, the utility's revolving credit facility was reduced to $1.94 billion from $2 billion. The credit facility backs PG&E's $1.75 billion commercial paper program. As of March 31, 2010, PG&E had $751 million of commercial paper and $265 million of letters of credit outstanding. Unrestricted cash and cash equivalents on PG&E's balance sheet totaled $60 million.

Earlier this year, the utility entered into a $750 million committed credit agreement, $500 million of which is to be used to provide liquidity to meet PG&E's procurement and collateral requirements. The remaining $250 million will be used for general corporate purposes. The bank facility provides additional liquidity following the maturity of its floating rate notes (FRNs) in June 2010. Proceeds from the FRNs were used to fund the utility's procurement activities. Like its other bank agreements, the PG&E $750 million credit agreement contains a maximum leverage ratio of 0.65:1 and expires in February 2012.

PCG and PG&E debt maturities are manageable over the coming five-year period. At the utility, $500 million, $400 million and $1 billion of debt is scheduled to mature in 2011, 2013 and 2014, respectively. No debt is scheduled to mature in 2010 or 2012. At the corporate parent level, total long-term debt is comprised of $350 million of 5.75% senior unsecured notes issued March 2009, due April 1, 2014.

As of March 31, 2010, PG&E's debt-to-total capitalization ratio was 50.7% on an adjusted basis. PG&E had $1.12 billion of Energy Recovery Bonds outstanding as of March 31, 2010, which Fitch deconsolidates from debt. Total adjusted debt as calculated by Fitch was $11.4 billion at the utility. Adjusted funds from operations-to-debt was 30% for the 12 months ended March 31, 2010.

As a result of the conversion of PCG's $247 million of 9.5% convertible notes in June 2010, Fitch calculates PCG parent-only total debt at $350 million on a pro forma basis as of March 31, 2010. Fitch expects PCG to continue to issue new shares under its DRIP and 401-k programs raising approximately $150 million-$200 million of new equity this year.

The relevant criteria used to determine the ratings of PCG and PG&E are listed below and available on Fitch's web site at www.fitchratings.com:

--'Utility Sector Notching and Recovery Ratings; (March 16, 2010);

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines'(Aug. 22, 2007);

--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 24, 2009);

--'Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector' (Nov. 7, 2005);

'--Credit Rating Guidelines for Regulated Utility Companies' (July 31, 2007); and,

--'Equity Credit for Hybrids & Other Capital Securities' (Dec. 29, 2009).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=254848

Credit Rating Guidelines for Regulated Utility Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

Equity Credit for Hybrids & Other Capital Securities - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112

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