NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Pacific Gas and Electric Company's (PG&E) senior unsecured notes. The Rating Outlook is Positive. Proceeds from the offering will be used for general corporate purposes and to repay short-term debt.
KEY RATING DRIVERS
--A final decision in PG&E's pending 2015 gas transmission and storage (GT&S) rate case;
--The final California Public Utilities Commission's (CPUC) decision (issued April 2015) in its investigation into PG&E's gas business in connection with the San Bruno pipeline explosion and fire removes a major credit overhang;
--Solid historical PG&E EBITDAR and funds from operations (FFO) leverage metrics, despite elevated natural gas business-related costs since Sept. 2010 and estimated strengthening credit metrics in 2016 and 2017;
--The constructive California regulatory compact, even in a highly politicized environment;
--Effective execution of PG&E's large capital program.
Fitch affirmed the ratings of PG&E and its corporate parent, PG&E Corporation (PCG; Issuer Default Rating [IDR] 'BBB+'; Outlook Positive) on Monday, Feb. 22, 2016 and revised the Rating Outlook to Positive for each.
PG&E's ratings and Positive 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.
Phase 2 of PG&E's pending 2015 GT&S rate case will determine which natural gas work will be disallowed as part of the $850 million of future safety work that will not be recoverable in rates as part of the penalty. Phase 1 of the GT&S proceeding is expected to address revenue requirements including any penalty associated with PG&E self-reported violations of CPUC ex parte communication rules. That penalty could be as much as five months of the incremental annual revenue increase granted to the company in the rate case. The company, in updated testimony, supports a $532 million test-year rate increase.
Fitch's projections assume reasonable outcomes in Phase 1 of PG&E's pending 2015 GT&S and its 2017 general rate cases (GRC) as well as in proceedings before the Federal Energy Regulatory Commission (FERC). On this basis, Fitch forecasts EBITDAR and FFO leverage metrics that are consistent with the low 'A' rating category. Fitch estimates that PG&E's FFO adjusted leverage will improve a full turn from 4.0x in 2014 to 3.0x in 2017. The utility's debt-to-EBITDAR is estimated by Fitch to strengthen from 3.2x in 2014 to 2.9x in 2017.
Other uncertainties include the pending federal criminal indictment of PG&E, along with separate CPUC investigations into the utility's gas distribution business records practices and safety culture. The CPUC has also opened an investigation into alleged ex parte communications issues.
In addition, the U.S. Attorney's Office in San Francisco and the California Attorney General's office have opened investigations of ex parte communications between the company and the CPUC. While these issues are sources of headline risk and could result in further fines and penalties, Fitch believes that they are unlikely to trigger adverse credit rating actions.
Of greater moment with regard to PG&E's credit quality will be the final 2015 GT&S decision, in Fitch's view. A reasonable outcome in PG&E's 2015 GT&S rate case would likely result in a one-notch IDR upgrade to 'A-' from 'BBB+' at PG&E, resolving the Positive Outlook.
PG&E filed its 2015 GT&S rate case in December 2013 for recovery of gas transmission and storage business costs. An administrative law judge (ALJ) decision is currently expected in the first quarter of 2016 and a final CPUC decision could be issued by the commission 30 days thereafter. Fitch notes that in addition to expected disallowed gas safety costs, certain unrecovered natural gas costs will continue through 2016 and 2017 relating to rights-of-way encroachment and other items.
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 assumed rate increase is consistent with the Office of Ratepayer Advocate's recommendation in the proceeding. The CPUC's final decision in the 2015 GT&S rate case will be retroactive to Jan. 1, 2015.
PG&E filed its 2017 GRC 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 supplemental testimony filed Feb. 22, 2016, PG&E reduced its 2017 test-year revenue increase request to $333 million. Attrition-year rate increases in 2018 and 2019 were also reduced, to $469 million and $368 million, respectively. The reduction in revenue requirement reflects the impact of the recent five-year extension of bonus depreciation.
Based on the most recent schedule in the GRC, a final decision is scheduled for Dec. 1, 2016. ORA and intervener testimony is expected in April 2016, and hearings end July 1, 2016.
Adverse regulatory developments or other factors causing Fitch's estimates of 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.
The San Bruno-related criminal prosecution of PG&E by the federal government is a source of some uncertainty and headline risk. The scope of the criminal proceeding has been reduced with regard to alternative fines and number of counts. Ultimately, Fitch believes exposure to the criminal investigation will not trigger adverse credit rating actions for PG&E. The trial is scheduled to begin in March 2016.
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. Fitch notes that management intends to fully fund any San Bruno-related penalty with equity. PCG has issued approximately $4 billion of common equity from 2011 through 2015 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.
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 credit supportive, in Fitch's view.
Fitch believes the regulatory compact in California remains supportive from a credit point-of-view, notwithstanding the virulently politicized San Bruno proceedings and large penalty meted out by the CPUC. The methane leak at Southern California Gas Company's (SCG; IDR 'A'; Outlook Stable) Aliso Canyon natural gas storage facility and admissions and allegations of ex parte rules violations have also fueled ongoing political uncertainty, 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.
Capex at PG&E is expected to be approximately $5.6 billion in 2016, compared to $5.4 billion in 2015. From 2017-2019, capex is projected by PG&E to range between $5.4 billion and $6.5 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 and fund San Bruno-related penalties with equity.
--Revenues escalate with inflation and reflect anticipated higher GT&S revenues.
--O&M is projected to grow at a 1.2% compound annual rate from 2014 through 2017.
--Capex is projected in the range of $5.3 billion-$5.7 billion during 2015-2017.
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 3.5x or better, respectively, on a sustained basis;
--Continuation of the credit-supportive regulatory compact in California from a credit point-of-view.
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 ratings and Outlook revision to Stable from Positive.
--Fitch believes future adverse credit rating actions would likely occur if projected EBITDAR and 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 billion available as of Dec. 31, 2015. Total liquidity includes cash and cash equivalents of $59 million as of Dec. 31, 2015 and borrowing capacity of $1.9 billion under PG&E's fully committed $3 billion credit facility. PG&E's bank facility matures in 2020.
Date of Relevant Rating Committee: Feb. 22, 2016
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)