Fitch Affirms PCG and PG&E's IDRs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) of PG&E Corporation (PCG) and its primary operating utility subsidiary, Pacific Gas and Electric Company (PG&E), at 'BBB+'.

In addition, Fitch has affirmed PCG and PG&E's short-term IDRs at 'F2' and assigned an 'F2' rating to PCG's commercial paper program. The Rating Outlook is Stable. Fitch has also affirmed all of PCG and PG&E's senior unsecured debt and the utility's commercial paper rating. A full list of rating actions is included at the end of this release.

Approximately $15 billion of consolidated PCG debt is affected by these rating actions.

KEY RATING DRIVERS

--The effect of unrecoverable costs and penalties related to the 2010 San Bruno pipeline explosion on PG&E's financials;

--Future regulatory proceedings including PG&E's 2015 gas transmission and storage (GT&S) rate case; and

--Effective execution of PG&E's large capital program.

PCG and PG&E's ratings and Stable Outlook reflect Fitch's expectation that the financial impact from the California Public Utilities Commission (CPUC) investigations into the utility's natural gas operations will be manageable within the current rating category.

The CPUC issued orders instituting investigation (OII) following the September 2010 San Bruno pipeline explosion. Fitch's projections assume a final CPUC decision consistent with presiding officers proposed decisions in the OII and that any penalty will be equity funded. A final decision is expected later this year.

In addition, Fitch assumes reasonable outcomes in pending rate cases before the CPUC and the Federal Energy Regulatory Commission. In this scenario, Fitch estimates that PG&E's financial measures will bottom during 2013-2015 and begin to improve.

PCG is dependent upon distributions from PG&E to meet its ongoing obligations and its ratings are closely linked to PG&E which is its sole operating subsidiary. Parent-only debt at PCG was $350 million as of Dec. 31, 2014 and PG&E's operations represent virtually all of PCG's consolidated assets, cash flow and earnings.

PG&E filed its GT&S rate case in December 2013 and a CPUC decision is expected the quarter of 2015 (3Q'15). Recovery by PG&E of post-2014 costs in rates should support its current 'BBB+' IDR and improving credit metrics beginning 2015. Fitch notes that certain unrecovered costs will continue through 2017 relating to rights-of-way encroachment and other items.

Adverse regulatory developments or other factors causing PG&E's projected EBITDAR leverage to weaken to 3.8x-4.1x or worse, on a sustained basis could trigger future credit rating downgrades at PG&E.

Among other things, a final decision significantly more punitive than the recommendations in the San Bruno OIIs, could lead to future adverse credit actions. In addition, anticipated penalties related to ex-parte communications with the CPUC, discussed below, are also a concern.

The San Bruno-related criminal prosecution of PG&E by the federal government is a source of uncertainty that Fitch believes will prove manageable within the current rating category.

Fitch's ratings for PG&E and the Stable Rating Outlook consider the challenges associated with the ongoing, significantly higher unrecoverable 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 costs of approximately $2.8 billion from 2010 through Dec. 31, 2014.

Both the CPUC's Consumer Protection and Safety Division (CPSD, now the Safety and Enforcement Division) amended reply brief and the administrative law judges' presiding officers decision (POD) in the San Bruno OIIs recommend fines and penalties of more than $2 billion. While timing is uncertain, a final commission decision is expected by Fitch later this year. Fitch believes that PG&E would be able to absorb penalties and fines consistent with the POD or CPSD's amended reply brief within the utility's current rating category.

Adverse financial effects associated with gas pipeline issues have been mitigated by substantial equity infusions from PG&E's corporate parent to maintain the utility's statutory 52% equity ratio. Fitch notes that management intends to fully fund any San Bruno related penalty with equity.

PG&E's ultimate corporate parent, PCG, has issued approximately $3.4 billion of common equity 2011 through Dec. 31, 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.

Going forward, Fitch anticipates reasonable outcomes in PG&E's pending 2015 GT&S and FERC transmission rate cases will support its creditworthiness. The GT&S rate case has been delayed due to PG&E's self-reported violation of the commission's ex parte communication rules. Rate changes in the pending GT&S rate case will be retroactive to Jan. 1, 2015.

A recent CPUC decision in its investigation of ex parte communication rules violations penalized PG&E $1.05 million and may result in a one-time penalty up to the amount of revenue increase that would have been collected by PG&E during the five month delay caused by the disclosure.

Fitch expects that the anticipated penalty will be finalized by the CPUC in the GT&S decision. It is unclear what the ultimate penalty will be, but Fitch calculates that it could be as much as $231 million on a reasonable worst-case basis.

Fitch believes that the ex-parte communications rule violation penalty will not materially impact PCG or PG&E's creditworthiness.

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. The disclosure by PG&E of improper communication between utility and CPUC personnel has resulted in a change in the assigned ALJ in the GT&S rate case.

In addition, PG&E's self-reported violation of ex parte communication has resulted in recusal of CPUC commissioner Michael Florio from the pending San Bruno OIIs and GT&S proceedings. (Former CPUC commissioner and President, Michael Peevey, also recused himself. Peevey did not seek reappointment and his term expired Jan. 1, 2015.)

In August 2014, the CPUC issued a final decision in PG&E's 2014 GRC authorizing a test year rate increase of $460 million. Factoring in attrition rate increases of $324 million in 2015 and $371 million in 2016 brings the total CPUC authorized rate increase to $1.155 billion during 2014-2016.

The 2014-2016 rate increase represents approximately 55% of PG&E's request and is a credit supportive development, in Fitch's view.

Fitch believes the political/regulatory environment in California remains balanced, notwithstanding the long, highly politicized San Bruno proceedings and expected large penalty.

The commission, in Fitch's opinion, is 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. This view is supported by balanced final decisions in recent general rate cases.

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 at PG&E was approximately $4.9 billion in 2014, with mid-point targets approximating $5.5 billion in 2015 and $5.6 billion in 2016.

Strong state and federal support for low-carbon policies and competitive threats from emerging technologies are secular credit concerns for PG&E, in Fitch's view. Remarks delivered by Governor Brown in his recent inaugural speech endorsing a 50% renewable standard and redoubled energy efficiency efforts underscore California's leading-edge carbon reduction policies.

Liquidity at PCG is solid with approximately $2.9 billion available as of Dec. 31, 2014. Total liquidity includes cash and cash equivalents of $96 million as of Dec. 31, 2014 and borrowing capacity under PCG and PG&E's fully committed $300 million and $3 billion credit facilities, respectively.

The one-notch upgrade to PG&E's preferred stock reflects probability of default and recovery prospects for PG&E's preferred and PCG's unsecured debt securities that are closely aligned, and is consistent with Fitch's updated Recovery Ratings and Notching Criteria for Utilities.

KEY ASSUMPTIONS

Fitch assumes a final outcome in the CPUC's investigations into PCG's natural gas business will be consistent with the proposed POD recommendation.

Fitch assumes PCG will continue to issue new equity to maintain the utility's 52% statutory equity ratio and fund any San Bruno related penalty with equity.

Revenues escalate with inflation and reflect anticipated higher GT&S revenues.

O&M is projected to grow at a 1.7% compound annual rate.

Capex is projected in excess of $5 billion per annum 2015 and 2016.

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 and/or GT&S rate proceeding 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, among other things, projected EBITDAR and funds from operations (FFO)-adjusted leverage ratios were to weaken to worse than 3.8x and 5.0x, respectively, 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 result in future credit downgrades.

Finally, competitive inroads and strong policy support for alternative energy supply present potential, secular challenges for PG&E's future creditworthiness, in Fitch's view.

A rating upgrade is unlikely prior to resolution of the CPUC's OIIs and related fines and penalties. However, resolution of the OIIs consistent with Fitch's expectations and a reasonable final decision in the utility's GT&S rate case could trigger future, positive credit rating actions.

Fitch has taken the following rating actions:

PCG

--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';

--Short-term IDR affirmed at 'F2';

--Senior unsecured notes affirmed at 'BBB+';

--Senior unsecured bank facility affirmed at 'BBB+'

--Commercial paper rating assigned at 'F2'.

The Rating Outlook is Stable.

PG&E

--Long-term Issuer Default Rating affirmed at 'BBB+';

--Short-term IDR affirmed at 'F2';

--Senior unsecured notes affirmed at 'A-';

--Senior unsecured bank facility affirmed at 'A-';

--Commercial paper affirmed at 'F2';

--Floating rate notes affirmed at 'F2';

--Preferred upgraded to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including short-Term Ratings and Parent Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Utilities'(March 5, 2015);

--'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=749393

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

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=980874

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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
Peter Molica, +1-212-908-0288
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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
Peter Molica, +1-212-908-0288
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com