NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to PG&E Corporation's (PCG) issuance of senior unsecured notes. The proceeds from the offering will be used to repay maturing parent company debt. The Rating Outlook is Stable. Virtually all of PG&E's consolidated assets, earnings and cash flows are contributed by its core operating utility subsidiary, Pacific Gas and Electric Company (PG&E).
KEY RATING DRIVERS
--The effect of unrecoverable costs and fines related to the San Bruno accident on PCG's financials;
--The ability of management to regain the confidence of its core constituencies in the wake of the San Bruno pipeline disaster;
--Future regulatory proceedings including PG&E's 2014 general rate case (GRC) and 2015 gas transmission and storage (GT&S) rate proceedings; and
--Effective execution of PG&E's large capital program.
PCG's ratings and Stable Outlook reflect Fitch's expectation that the financial impact of future California Public Utilities Commission (CPUC) decisions in pending orders instituting investigation (OII) regarding the utility's role in the Sept. 2010 San Bruno pipeline explosion and fire will be manageable within the current rating category in a reasonable worst-case scenario.
In this scenario, Fitch estimates that PCG's financial measures will bottom in 2013-2014 and begin to improve. In addition, Fitch assumes continued equity issuance and reasonable outcomes in pending rate cases before the CPUC and the Federal Energy Regulatory Commission.
Notwithstanding financial pressure in the wake of the disaster, PCG's credit metrics are expected to remain consistent with its current 'BBB+' Issuer Default Rating. Unexpectedly adverse regulatory developments at the utility would likely trigger credit rating downgrades at PCG. Future downgrades could occur if projected PCG EBITDA-to-interest expense and debt-to-EBITDA ratios were to weaken meaningfully below 5x and above 4x, respectively, on a sustained basis.
Fitch's ratings for PCG and the Stable Rating Outlook reflect the adverse effects of ongoing, significantly higher costs being absorbed by the utility primarily to enhance pipeline safety in the aftermath of the September 2010 San Bruno disaster. Fitch calculates that PG&E has incurred pipeline-related direct costs of approximately $2.5 billion from 2010 through December 30, 2013.
Fitch notes that these adverse financial effects have been partially offset by substantial equity issuance by PCG to maintain PG&E's statutory 52% equity ratio and authorized rate increases, including settlement of its 2011 GRC. Going forward, Fitch anticipates reasonable outcomes in PG&E's pending 2014 GRC and 2015 GT&S rate proceedings. Fitch expects an administrative law judge's proposed decision in PG&E's pending 2014 GRC will be issued in the first quarter 2014 and a final CPUC decision before mid-year, with rates retroactive to Jan. 1, 2014.
PG&E filed its GT&S rate case in December 2013 requesting a $555 million (75%) rate increase above the utility's $731 million authorized 2014 revenue requirement. A schedule for the proceeding has not been released but given the magnitude and complexity of the rate case a final decision may not be forthcoming by Jan. 1, 2015. Fitch expects management to request that if a final decision is issued post-Jan. 1, 2015 that the CPUC authorize rates to be retroactive.
Fitch calculates that PCG has issued approximately $2.5 billion of common equity from 2011 - 2013 to support the utility's balance sheet and maintain its statutory equity ratio. Fitch's ratings and Stable Outlook assume that PCG will continue to support the utility's balance sheet as necessary with equity issuance.
In July 2013, the CPUC's Consumer Protection and Safety Division (CPSD, now the Safety and Enforcement Division) filed an amended reply brief recommending an apparent $2.25 billion penalty in the OIIs. The CPSD recommended penalty includes a $300 million fine and disallows recovery of past and future costs and required investments to be made by PG&E under its commission-approved pipeline safety enhancement plan (PSEP). Fitch notes that neither the administrative law judges (ALJ) in the OII proceedings or the CPUC are bound by the CPSD recommendation. The ALJs are expected to issue proposed decision in the San Bruno OII by the end of the first quarter 2014 and a final CPUC decision could be forthcoming in the second quarter 2014.
The three pending OIIs examine: 1) PG&E's safety and recordkeeping for its natural gas transmission systems; 2) operation of the utility's gas transmission pipeline near locations of higher population density; and, 3) general operational practices, events and conduct by the utility that may have contributed to the San Bruno pipeline explosion and fire.
The CPUC approved PG&E's PSEP to modernize and upgrade its natural gas transmission system in December 2012. PG&E filed the PSEP in Aug. 2011 to comply with the CPUC's order instituting rulemaking (OIR) to develop and implement natural gas transmission and distribution system safety and reliability regulations. The CPUC order approved PG&E's PSEP, disallowing rate recovery of a significant portion of the plan's costs.
The CPUC's final Dec. 2012 PSEP decision authorized $1.169 billion of PSEP costs in rates in 2012-2014. Cost recovery was subject to adjustment pending the outcome in the penalty phase of the OIIs. In Fitch's view, the CPSD recommendation, if authorized by the CPUC, would disallow recovery of PSEP 2011-2014 expenditures that were previously approved for recovery by the commission in its PSEP final decision.
Fitch believes the political/regulatory environment in California is balanced, notwithstanding the long and highly politicized San Bruno proceedings. The commission appears to remain committed to financially robust, investment-grade electric utilities in the state, recognizing that investor-owned utilities are a crucial conduit in achieving state energy policy goals.
Revenue decoupling, regulatory balancing accounts, forward-looking test years and pre-approval of planned capital expenditures greatly reduce PG&E's exposure to regulatory lag, and operating cash flow attrition, in Fitch's opinion, and mitigate concern regarding PG&E's large capex program. Capex is expected to approximate $5 billion - $6 billion in 2014.
Liquidity at PCG is solid with approximately $2.3 billion available as of Dec. 31, 2013, including cash and cash equivalents of $296 million and borrowing capacity under its fully committed credit facilities. In April 2013, PCG and PG&E's committed credit facilities totaling $3.3 billion were amended, extending their termination dates to April 2018.
There is no long-term parent company debt outstanding other than the $350 million of 5.75% senior notes due April 1, 2014. Fitch calculates that PG&E debt maturities during 2014-2018 will approximate $2.96 billion. Of the $2.96 billion of scheduled utility company debt maturities, $539 million is scheduled to mature in 2014.
PCG's credit metrics are consistent with the 'BBB+' rating category, based on Fitch's estimates, but may weaken if regulatory decisions are more punitive than expected. Adverse outcomes in pending San Bruno OIIs, GRC and/or GT&S rate proceedings could lead to future adverse rating actions. In addition, ineffective execution of PG&E's large capex program could lead to future credit rating downgrades. Fitch believes future downgrades would likely occur if projected EBITDA-to-interest expense and debt-to-EBITDA ratios were to weaken meaningfully below 5.0x and above 4.0x, respectively, on a sustained basis. The pending criminal investigation into the San Bruno pipeline explosion and fire is also a concern.
Within the next 12 months, an upgrade is unlikely in light of the uncertainty related to the pending financial exposure anticipated in the wake of the San Bruno disaster. However, as the company absorbs the financial impact and moves past the disaster, future credit rating upgrades are possible with sustained financial improvement and credit-supportive final decisions in the utility's pending GRC and GT&S proceedings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (July 27, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Equity REITs
Short-Term Ratings Criteria for Non-Financial Corporates