Fitch Rates PG&E's Senior Notes 'A-'; Rating Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Pacific Gas and Electric Company's (PG&E) $350 million new issuance of 3.40% senior unsecured notes due Aug. 15, 2024. Fitch also rates PG&E's additional $225 million issuance of its 4.75% senior notes due Feb. 15, 2044 'A-'. Proceeds from the offering will be used by PG&E for general corporate purposes including repayment of a portion of its commercial paper balances. The Rating Outlook is Stable. PG&E is a wholly-owned operating subsidiary of PG&E Corporation (PCG; Issuer Default Rating 'BBB+'; Rating Outlook Stable).

KEY RATING DRIVERS

--The effect of unrecoverable costs and fines related to the San Bruno accident on PG&E'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.

PG&E'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 PG&E's financial measures will bottom during 2013 - 2014 and begin to improve in 2015. Fitch assumes continued equity issuance and reasonable outcomes in pending rate cases before the CPUC and the Federal Energy Regulatory Commission. Recovery of incurred costs should support improving credit metrics 2015 and beyond, supporting the 'BBB+' Issuer Default Rating. Fitch notes that certain unrecovered costs will continue through 2017 relating to rights-of-way encroachment and other items.

Unexpectedly adverse regulatory developments at the utility could trigger credit rating downgrades, however. Future downgrades could occur if projected PG&E EBITDAR leverage was to exceed 3.75x, on a sustained basis.

Fitch's ratings for PG&E 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 $2.6 billion from 2010 through June 30, 2014.

Fitch notes that these adverse financial effects have been partially offset by substantial equity infusions from its corporate parent to maintain PG&E's statutory 52% equity ratio and CPUC authorized rate increases, including settlement of PG&E's 2011 GRC. Going forward, Fitch anticipates reasonable outcomes in PG&E's pending 2014 GRC and 2015 GT&S rate proceedings will support the utility's creditworthiness at its current rating level.

The administrative law judge's (ALJ) proposed decision (PD) in PG&E's pending 2014 GRC was issued in June 2014. The ALJ PD in the proceeding would increase PG&E's 2014 rates $453 million (6.8%) effective Jan. 1, 2014 if adopted by the commission. Attrition rate increases included in the PD are $322 million in 2015 and $371 million in 2016, bringing the total 2014 - 2016 rate increase to $1.1 billion. The $1.1 billion PD rate increase over three years represents approximately 55% of the utility's requested rate increase and appears consistent with rate case outcomes in recent years for the large California-based investor owned utilities. A CPUC final decision could be issued at its next public meeting scheduled for Aug. 14, 2014, with rates retroactive to Jan. 1, 2014.

Fitch calculates that PG&E's ultimate corporate parent, PCG, has issued approximately $3.1 billion of common equity from 2011 - 2Q 2014 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.

PG&E filed its GT&S rate case in December 2013 requesting a $555 million (76%) rate increase above the utility's $731 million authorized 2014 revenue requirement. A schedule in the proceeding has been released indicating a CPUC final decision will be forthcoming during the first quarter 2015, although that may slip given the magnitude and complexity of the rate filing. The CPUC final decision in the GT&S proceeding will be retroactive to Jan. 1, 2015. Fitch expects a final decision consistent with recent experience in other California general rate case filings would support PG&E's current ratings.

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 ALJs in the OII proceedings or the CPUC are bound by the CPSD recommendation. In a ruling issued July 31, 2014, the ALJs indicated that the proposed officers decisions (POD) in the OIIs will be issued within 60 days.

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 August 2011 to comply with the CPUC's order instituting rulemaking 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 December 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 PG&E is solid with approximately $1.9 billion available as of June 30, 2014, including cash and cash equivalents and borrowing capacity under its fully committed $3 billion credit facility.

RATING SENSITIVITIES

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 leverage ratios were to weaken to 3.75x on a sustained basis.

The criminal indictment of the utility as a result of its role in the San Bruno pipeline explosion and fire is also a concern, but not expected by Fitch to impact PG&E's creditworthiness.

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: Including short-Term Ratings and Parent Subsidiary Linkage' (Aug. 5, 2013);

--'Recovery Ratings and Notching Criteria for Utilities'(Nov. 19, 2013);

--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=847915

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Jiang, +1-212-908-0708
Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Jiang, +1-212-908-0708
Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com