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
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
--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
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
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
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
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.
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.
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.
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
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
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:
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Senior unsecured notes at 'BBB+';
--Senior unsecured bank facility at 'BBB+'.
--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'.