Fitch: ALJ OII Recommendation Won't Alter PG&E's Ratings

NEW YORK--()--Pacific Gas & Electric Co. (PG&E) and its corporate parent, PG&E Corp. (PCG) will be able to absorb fines and penalties related to a 2010 pipeline explosion within their 'BBB+' rating categories, according to Fitch Ratings. The recommendation was handed down last week via the administrative law judge's (ALJs) presiding officers' decision (POD).

The POD was issued in connection with the California Public Utilities Commission (CPUC) orders instituting investigation (OII) into the San Bruno 2010 pipeline explosion and other aspects of the company's gas transmission operations. The CPUC is not bound by the POD and it is unclear when a final decision will be issued. The company intends to appeal the POD. A final decision in the CPUC investigations that is meaningfully more punitive than either the ALJ or Consumer Protection and Safety Division's (CPSD - now, the Safety and Enforcement Division) could lead to future adverse credit rating actions.

On Sept. 2, 2014, the ALJs in the CPUC's ongoing OII issued a POD recommending a $2.035 billion penalty and cost disallowance in connection with the San Bruno pipeline explosion and fire, which resulted in 8 deaths, injuries and extensive property damage. It includes a $950 million fine payable to the California general fund; a $400 million refund of previously authorized pipeline safety costs; an additional $50 million of disallowed costs; and $635 million of previously disallowed pipeline safety costs. Fitch believes the ALJ's recommended penalty is broadly consistent with the CPSD's $2.25 billion recommended penalty from a credit point of view, though different in its components.

Fitch expects OII-related fines and penalties to be funded with equity. PG&E's credit metrics have been pressured by unrecovered pipeline costs. Offsets to higher San Bruno-related operating costs incurred by PG&E include GRC-mandated tariff increases, deferred tax benefits and significant common equity issuance at PCG and infusions into PG&E. Fitch expects PCG and PG&E's credit metrics to begin to recover during 2015-2016 in a reasonable worst-case outcome, assuming a final penalty decision later this year or early 2015. This scenario is predicated on a balanced outcome in PG&E's pending 2015 natural gas transmission and storage rate case.

While investors have expressed concern regarding the size of the proposed disallowance and its implications for the regulatory compact in California, Fitch continues to believe that the regulatory environment in California is balanced. The CPUC's August 2014 final decision in PG&E's 2014 GRC was credit supportive in Fitch's view, authorizing 2014-2016 test-year and attrition-year rate increases representing approximately 55% of PG&E's total request.

For further information please refer to Fitch Ratings' special report "California Regulation: Balancing Act" dated Aug. 2014 and full reports published March 19, 2014 for PG&E and PCG.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

California Regulation: Balancing Act

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758267

Pacific Gas & Electric Company (A Subsidiary of PG&E Corporation)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740844

PG&E Corporation

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741316

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Philip W. Smyth, CFA, +1 212-908-0531
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Kellie Geressy Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Philip W. Smyth, CFA, +1 212-908-0531
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Kellie Geressy Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com