TEXT - Fitch affirms PG&E Corp
Dec 13 - Fitch Ratings has affirmed the 'BBB+' Issuer Default Ratings (IDR) of PG&E Corporation (PCG) and its primary operating utility subsidiary, Pacific Gas and Electric Company (PG&E). The Rating Outlook is Stable. In addition, Fitch has affirmed PCG and PG&E's 'F2' short-term IDRs. A list of PCG and PG&E's IDR and security ratings is provided below. More than $13.4 billion of consolidated PCG debt is affected by today's rating action. KEY RATING DRIVERS --The magnitude of unrecoverable costs and fines related to the San Bruno accident to be absorbed by PCG and its effect on PCG and PG&E financials; --Uncertainty related to the final California Public Utilities Commission (CPUC) decision in the pending order initiating rulemaking (OIR) underway at the CPUC, which will determine recovery of prospective natural gas pipeline safety-enhancement costs; --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); --The criminal investigation of PG&E;, --Effective execution of PG&E's large capital program. EXPECTED FINANCIAL EXPOSURE MANAGEABLE The PCG and PG&E ratings affirmation and Stable Rating Outlook reflect Fitch's opinion that the financial impact of future CPUC rulings in its pending order initiating rulemaking (OIR) and orders initiating investigation (OII) regarding the September 2010 San Bruno pipeline explosion and fire will be manageable within PCG and PG&E's current rating category. SOLID CREDIT METRICS Notwithstanding financial pressure from the San Bruno pipeline explosion and fire, PCG and PG&E's credit metrics remain strong. Fitch estimates consolidated debt-to-EBITDA of approximately 3.5x-3.6x in 2012-2013, improving to 3.2x in 2014. EBITDA-to-interest is projected to be 5.7x-5.8x in 2013 and is estimated by Fitch to improve to 6.6x in 2014. Adverse outcomes in pending regulatory proceedings or an inability to effectively execute PG&E's large capex program could lead to future rating downgrades. Fitch believes future downgrades would occur if projected EBITDA-to-interest expense and debt-to-EBITDA ratios were to weaken to below 5x and above 4.0x, respectively SETTLEMENT POSSIBLE PCG management and the relevant parties to the proceedings have been in negotiations to secure a global settlement of San Bruno related issues. In a settlement scenario, Fitch believes that the commission could issue a final decision resolving all San Bruno-related issues around the end of the first quarter 2013. In October 2012, the administrative law judges (ALJ) in the OIIs granted the consumer protection and safety division's (CPSD) motion to suspend proceedings in two of three of the pending OIIs to facilitate settlement discussions. While Fitch believes that a stipulated agreement with the major parties to the San Bruno related proceedings that would support PCG and PG&E's current ratings is achievable, such an outcome is by no means assured. RULEMAKINGS AND INVESTIGATION Meanwhile the class location OII and OIR are proceeding along parallel paths with settlement negotiations, and Fitch believes that the CPUCs will issue a final decision in the OIR by the end of January 2013, possibly at the next CPUC meeting on Dec. 20, 2012. Final decisions in the three OIIs by would likely be issued around mid-2013, if a settlement agreement cannot be reached. ALJPD ISSUED IN OIR The ALJ in the OIR issued a proposed decision in October 2012 that approved the most of the projects proposed in PG&E's pipeline safety enhancement plan (PSEP). However, the ALJ proposed decision (PD) reduces the authorized return on equity (ROE) on PSEP investment to the utility's cost of debt for the first five years and limits the amount of operating expense and capital investment that would be recoverable in rates to $167 million and $1 billion, respectively, in 2013 and 2014. ELEVATED OPERATING COSTS Fitch's ratings for PCG and PG&E and the Stable Rating Outlook reflect the adverse effects of ongoing, significantly higher costs being absorbed by the utility 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 $917 million from 2010 through Sept. 30, 2012. Factoring in the $200 million charge booked by PG&E in 2011 to reflect the low end of a range for a potential fine at the conclusion of the OIIs, a $70 million contribution to the city of San Bruno and third-party liabilities net of insurance recoveries through the end of third quarter 2012, Fitch calculates total San Bruno-related costs of $1.4 billion have been incurred by PG&E. OIR LINKAGE TO OIIS The CPUC has opened three proceedings to investigate PG&E's natural gas operations (in addition to the OIR proceeding). Barring a settlement, Fitch anticipates completion of these proceedings during the summer of 2013, considerably later than Fitch's prior expectations. The recommended rates in the recent ALJ proposed decision in the OIR could change depending on the outcome in the penalty phase of the OIIs, injecting an additional source of uncertainty for investors, in Fitch's view. INTENSE REGULATORY SCRUTINY The operating environment for PG&E remains challenging as the result of the San Bruno disaster. PG&E has come under significant regulatory scrutiny as a result of the accident and will continue to be subject to meaningfully higher operating and capital expense to comply with emerging regulatory pipeline safety requirements. Direct costs related to the San Bruno accident were $483 million in 2011 and are expected to approximate $450 million-$550 million in 2012. For the first nine months of 2012, pipeline-related costs were $371 million. THIRD-PARTY LIABILITIES PCG management estimates third-party liability exposure related to San Bruno at $455 million-$600 million. PCG booked a charge of $220 million in 2010, $155 million in 2011 and $80 million through the end of third quarter 2012, which are reflected in the lower end of its estimated exposure range for third-party liability exposure. PG&E's aggregate level of liability insurance for damages totals approximately $992 million of coverage with a $10 million deductible. Fitch believes the impact will be manageable as insurance payments should timely follow covered payouts. INCREASING DEBT Consolidated PG&E debt has increased from approximately $12 billion in 2008 to $14 billion at the end of 2011 and is expected to continue to grow rapidly through 2016, reflecting the utility's large capital investment program. During 2012-2016, funds from operations (FFO)-to-debt is forecast by Fitch to remain within the low-to-mid 20% range. Debt-to-EBITDA peaks at around 3.6x in 2013 and is forecast by Fitch to improve to 3.1x in 2016. CAPEX AND THE REGULATORY COMPACT Given California energy policy and infrastructure requirements and the incremental capital required to improve pipeline safety, Fitch believes annual capex at PG&E will approximate $4.6 billion-$5 billion during 2012-2014. The resulting need for external funding is expected by Fitch to be provided by a balanced mix of debt and equity. Timely recovery of investment and the importance of the continuation of a balanced regulatory compact in California remains a key factor to the maintenance of PG&E's current credit profile. SOLID LIQUIDITY Liquidity at PCG and PG&E is solid with approximately $3.3 billion available at the consolidated parent and $2.8 billion at the utility. As of Sept. 30, 2012, PCG and PG&E had cash and cash equivalents of $296 million and $86 million, respectively. PCG and PG&E's $300 million and $3 billion respective bank facilities mature in May 2016. Debt maturities for consolidated PCG are approximately $2.7 billion through 2016. There is $350 million of parent company debt, which is scheduled to mature in 2014. BALANCED REGULATORY ENVIRONMENT Fitch believes the political/regulatory environment in California will remain balanced and committed to financially strong electric utilities in the state, recognizing that investor-owned utilities are crucial to achievement of 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. WHAT COULD TRIGGER A DOWNGRADE The inability for the company and other relevant parties to the San Bruno proceedings to reach a settlement would set the stage for a fully-litigated outcome. The primary concern is that final CPUC decisions in pending OIR and OII proceedings will exert significant downward pressure on projected credit metrics. PCG and PG&E's credit metrics are consistent with the 'BBB+' rating category, based on Fitch's estimates, but might weaken if regulatory decisions are not forthcoming on a timely basis and are more punitive that expected. The ALJ proposed decision in the OIR limits expense and capital cost recovery and reduces the authorized ROE on investment in the PSEP to the cost of debt for five years (i.e. 6.05%). In addition, rates approved in the proposed OIR decision could change depending on the outcome in the OIIs. Adverse outcomes in pending regulatory proceedings or an inability to effectively execute PG&E's large capex program could lead to future credit rating downgrades. Fitch believes future downgrades would occur if projected EBITDA-to-interest expense and debt-to-EBITDA ratios were to weaken to below 5x and above 4.0x, respectively, on a sustained basis. Fitch notes that the company has absorbed more than $917 million of direct costs as the result of the disaster through the third quarter 2012. WHAT COULD TRIGGER AN UPGRADE At this juncture, an upgrade is unlikely in light of the uncertain future ahead of the company, as it will take time, even if a settlement is reached in the near future to repair its relationships with key constituents and meaningfully improve its financial profile, in Fitch's opinion. Fitch has affirmed the following ratings: PCG --Long-term IDR at 'BBB+'; --Short-term IDR at 'F2'; --Senior unsecured notes at 'BBB+'; --Senior unsecured bank facility at 'BBB+'. PG&E --Long-term IDR at 'BBB+'; --Short-term IDR at 'F2'; --Senior unsecured notes at 'A-'; --Senior unsecured bank facility at 'A-'; --Preferred at 'BBB'; --Commercial paper at 'F2'.