NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Pacific Gas and Electric Company's (PG&E's) $400 million 4.0% coupon senior unsecured notes. Fitch has also assigned an 'F2' rating to the utility's $250 million floating rate notes (FRN) issuance. Proceeds from the offering will be used for general corporate purposes, to repay short-term debt and for the redemption of $160 million of variable rate pollution control bonds. The Rating Outlook for PG&E is Positive.
KEY RATING DRIVERS
Ratings Affirmed: Fitch affirmed the ratings of PG&E and its corporate parent, PG&E Corporation (PCG; Issuer Default Rating [IDR] 'BBB+'; Rating Outlook Positive) in Feb. 2016 and revised the Rating Outlook to Positive for each.
San Bruno Concerns Recede: PG&E's ratings and Positive Rating Outlook reflect Fitch's expectation that the worst of the financial impact of the San Bruno pipeline explosion is over. The CPUC in its April 2015 final decision in the penalty phase of the commission's San Bruno pipeline investigation ordered PG&E to pay $1.6 billion of penalties, fines and remedies. The penalty is composed of $850 million of natural gas safety spending that will not be recoverable in rates, a $400 million credit to natural gas customer bills, a $300 million fine payable to California's General Fund and an estimated $50 million of other remedies.
2015 GT&S: In June, 2016, the CPUC voted to adopt Commissioner Peterman's modified Alternate Proposed Decision. The final CPUC decision authorizes a net $193 million (27%) revenue increase, including a $138 million placeholder disallowance pending determination of a final revenue requirement in the next phase of the GT&S rate case. The placeholder disallowance reflects ex-parte penalties before future reduction in revenue requirement related to determination of disallowed projects to comply with the San Bruno penalty in the second phase of the GT&S rate proceeding. Rates are subject to adjustment to reflect $850 million of shareholder-funded safety-related expenditures imposed by the CPUC in the San Bruno penalty decision. The commission order also includes a third attrition-year rate increase in 2018.
PG&E filed its 2015 GT&S rate case in December 2013 for recovery of GT&S business costs. Fitch has assumed a rate increase of approximately $300 million in PG&E's GT&S rate case, before fines, penalties and other unrecoverable costs. The CPUC's final decision in the 2015 GT&S rate case is retroactive to Jan. 1, 2015 and the under-collection will be amortized over 36 months. Fitch believes a final CPUC decision in PG&E's 2015 GT&S rate case that is consistent with either Commissioner Peterman's modified Alternate Proposed Order or the administrative law judge's (ALJ's) proposed decision (PD), discussed below, would support favourable resolution of PG&E's Positive Rating Outlook.
On Nov. 3, 2016, the ALJ in PG&E's 2015 GT&S rate case issued a proposed decision recommending a 2015 test-year rate increase of $100 million net of a $72 million disallowance for violation of ex parte communication rules by PG&E. In addition to the $172 million 2015 test-year rate increase before the penalty disallowance, the ALJ PD recommends attrition-year rate increases of $246 million in 2016, $64 million in 2017 and $105 million in 2018. While the ALJ proposed test-year rate increase is meaningfully lower (48%) than the $331 million test-year rate increase authorized in the CPUC's interim decision before the ex parte disallowance, the cumulative 2015 - 2018 rate increase in the ALJ PD of $587 million is consistent with the cumulative rate increase included in the CPUC interim decision of $610 million.
The adverse financial effects associated with gas pipeline issues have been mitigated by substantial equity infusions from PCG to maintain the utility's statutory 52% equity ratio. PCG has issued approximately $4 billion of common equity from 2011 through 2015 and an additional $727 million during the first nine months of 2016 to support the utility's balance sheet and maintain its statutory equity ratio. Fitch's ratings and Positive Outlook assume that PCG will continue to support the utility's balance sheet as necessary with equity issuance.
2017 GRC: In August 2016, PG&E filed a settlement agreement with the CPUC which, if approved by the commission, would increase test-year rates $90 million. In addition, the filing contemplates attrition-year rate increases of $334 million in 2018 and $265 million in 2019. The settlement also includes a non-unanimous third attrition year rate increase of $265 million. A final CPUC decision authorizing the proposed settlement would be a favorable development from a credit point of view.
PG&E filed its 2017 GRC on Sept. 1, 2015. The utility initially supported a test-year rate increase of $457 million and attrition rate increases of $489 million and $390 million, respectively, in 2018 and 2019. In subsequent testimony filings, PG&E reduced its 2017 test year revenue increase request to $319 million. Attrition-year rate increases in 2018 and 2019 were also reduced to $467 million and $368 million, respectively. The Office of Ratepayer Advocates (ORA) recommended an $85 million rate decrease in 2017 and attrition-year rate increases of $274 million and $283 million in 2018 and 2019, respectively. The ORA also recommended to extend the GRC cycle an additional year, recommending a 2020 attrition-year rate increase of $294 million.
Solid Credit Metrics: Fitch forecasts EBITDAR and FFO leverage metrics that are consistent with the low 'A' rating category in 2016 and 2017. Fitch estimates that PG&E's FFO adjusted leverage will approximate 4x or better in 2016 and 2017 and that debt-to-EBITDAR will approximate 3.4x or better.
Constructive Regulation: Fitch believes the regulatory compact in California remains supportive from a credit point of view, notwithstanding the highly politicized San Bruno proceedings and large penalty meted out by the CPUC. This, combined with the Aliso Canyon natural gas storage facility methane leak and admissions and allegations of ex parte rules violations, has fueled investor concerns regarding the stability of the regulatory compact, in Fitch's view.
Nonetheless, Fitch believes the CPUC remains committed to maintaining 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 the balanced final decisions in general and gas transmission and storage rate cases in recent years.
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.
An unexpected, meaningful deterioration in the political/regulatory environment in California could lead to adverse credit rating actions. Deterioration in the regulatory compact or other factors causing Fitch's estimates of PG&E's projected EBITDAR leverage to weaken to 3.8x to 4.1x and FFO-adjusted leverage to 5x or worse, on a sustained basis, could trigger future credit rating downgrades.
Large Capex Program: Execution risk associated with PG&E's large capex program is a concern for the utility's creditworthiness. Capex at PG&E is expected to approximate $5.7 billion in 2016. In 2017 - 2019, capex is estimated at $6 billion annually. Risk associated with PG&E's large capex program is mitigated by regulatory mechanisms in place to facilitate timely recovery of such costs, in Fitch's opinion. In addition, Fitch views strong state and federal support for low-carbon policies and competitive threats from emerging technologies as secular credit concerns for PG&E.
Fitch's key assumptions within the rating case for PG&E include:
--PCG will continue to issue new equity to maintain the utility's 52% statutory equity ratio.
--Revenues escalate with inflation and reflect anticipated higher GT&S revenues.
--O&M is projected to grow at approximately 1% compound annual rate 2016 - 2017.
--Capex is projected in the range of $5.7 billion to $6 billion annually during 2016 - 2019.
Future developments, individually or collectively, that could lead to a future PG&E upgrade include:
--A final CPUC decision in PG&E's pending GT&S rate case consistent with Fitch's expectations;
--Evidence of improving financials consistent with sustained PG&E debt-to-EBITDAR and FFO-adjusted leverage of 3.4x and 4.0x or better, respectively, on a sustained basis;
--Continuation of the credit-supportive regulatory compact in California.
Developments that would lead to future revision of PG&E's Rating Outlook to Stable from Positive and/or credit rating downgrades:
--An unexpectedly punitive outcome in PG&E's 2015 GT&S rate case and/or other events that would cause credit metrics to weaken significantly below Fitch's current expectations could lead to affirmation of PG&E's current 'BBB+' ratings and Outlook revision to Stable from Positive.
--Fitch believes future adverse credit rating actions would likely occur if 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.
--In addition, ineffective execution of PG&E's large capex program could lead to 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.
Liquidity at PG&E is solid with approximately $2,309 million available as of Sept. 30, 2016. Liquidity is comprised of available borrowing capacity of $2,238 million under PG&E's $3 billion fully committed, revolving credit facility plus cash and cash equivalents of $71 million as of Sept. 30, 2016. PG&E's revolving credit facility matures April 2021.
Relevant Committee Date: Feb. 22, 2016.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage - Effective from 17 August 2015 to 27 September
2016 (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis - Effective from 25 November 2014 ￢ﾀﾓ 29 February 2016
(pub. 25 Nov 2014)
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001