The credit rating for PG&E Corp. and utility subsidiary Pacific Gas & Electric Co. face a “one-in-three probability” for weaker business and financial profiles over the coming year related to the San Bruno, CA natural gas pipeline explosion, according to Standard & Poor’s Ratings Services (S&P).
The ratings agency revised its outlook for the corporation and subsidiary to “negative” from “stable” on Wednesday. All of the short-and long-term ratings, including a “BBB” corporate credit rating, were affirmed. S&P maintained the business profile as “strong,” but said the financial risk is “significant.”
“The negative outlook reflects our view that there is at least a one-in-three probability that the financial penalties from the San Bruno pipeline explosion will be at the California Public Utilities Commission (CPUC) staff’s most recent revised recommendation of approximately $2.25 billion, the company will have ongoing difficulty managing regulatory risk, and the company’s willingness or ability to issue equity could be limited,” wrote credit analyst Gabe Grosberg.
“Under this scenario, the penalty is partially financed with debt and funds from operations (FFO) to debt gradually decreases to below 15%, thereby increasing the risk of a modest downgrade.
PG&E CEO Anthony Earlier recently alluded to the prospect of bankruptcy for the utility arm if the proposed penalty is upheld by CPUC (see Daily GPI, Aug. 23).
Grosberg noted those comments in his report. “In recent comments with regard to potential San-Bruno related penalties, a senior PG&E executive noted that under certain circumstances there exists the remote possibility of a bankruptcy filing if the company can’t raise sufficient capital,” he said.
“While we view this outcome as highly unlikely based on current information, we nevertheless view the comments revealing because they raise the probability that, at some point, the company’s willingness or ability to issue equity for the full amount of out-of-pocket costs and fines could be limited.”
S&P would downgrade the companies “if all of the above occurs,” said Grosberg. “Under the…scenario, the company’s business risk profile would continue to be assessed as strong for the longer term, reflecting its inability to effectively manage regulatory risk.
“In addition, we would expect a longer-term weakening of the financial measures due to a higher percentage of debt and weaker cash flow. We would revise the outlook to stable if any of the [noted] risks do not materialize. This would lead to a combination of a more stabilized business risk profile and financial measures that more align with our base-case scenario of FFO to debt minimally greater than 17%.”
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