OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to Pacific Gas and Electric Company's (PG&E's) issuance of senior unsecured notes. Proceeds from the offering will be used by PG&E for general corporate purposes including repayment of commercial paper. The Rating Outlook is Stable. PG&E is a wholly-owned operating subsidiary of PG&E Corporation (PCG; Issuer Default Rating 'BBB+'; Outlook Stable).

KEY RATING DRIVERS

--The effect of California Public Utilities Commission (CPUC) mandated San Bruno penalty on PG&E's financials;
--Regulatory proceedings including PG&E's 2015 gas transmission and storage (GT&S) rate case and related ex-parte communication issues;
--Equity funding of CPUC fines and penalties;
--Resolution of CPUC's investigations into PG&E natural gas distribution record keeping and safety culture investigations;
--Effective execution of PG&E's large capital program.

The CPUC voted in April 2015 to adopt penalties and fines as proposed in CPUC President Michael Picker's modified decision. The vote brings to a conclusion the CPUC's orders initiating investigation (OII) into PG&E's natural gas business in connection with the September 2010 San Bruno pipeline explosion.

The $1.6 billion penalty includes $850 million of future gas safety work that will not be recoverable in rates, a $400 million credit to natural gas customers, a $300 million fine, which has been paid to California's General Fund by PG&E, and $50 million of other remedies.

The CPUC decision in the penalty phase of the OII is consistent with Fitch's projections and expected by Fitch to be manageable within the current rating category. Resolution of the San Bruno OII removes a major source of uncertainty and headline risk.

Remaining uncertainties include the anticipated final decision in PG&E's GT&S rate case (and x related penalty associated with the utility's ex-parte communications breach), the 28-count U.S. criminal indictment, CPUC investigation of gas distribution business record keeping and funding of the $1.6 billion OII penalty.

Fitch assumes PCG will, as indicated in public comments by management, fund the entire San Bruno penalty with equity. This, combined with a reasonable outcome in PG&E's GT&S rate case could trigger future positive rating actions. On a year-to-date basis Sept. 30, 2015, PCG has injected $605 million of equity into the utility.

Implementation of the San Bruno penalty has caused significant delay to an expected final decision in PG&E's pending GT&S rate proceeding. Fitch expects the rate case will be finalized mid-2016. Proceedings initiated by the commission investigating PG&E's record keeping practices are a source of some uncertainty from a credit point-of-view. The CPUC's en banc proceeding regarding PG&E's safety culture provides an opportunity for management to demonstrate changes implemented to improve its safety culture, in Fitch's view.

Fitch believes the political/regulatory environment in California is balanced. The CPUC appears committed to financially robust, investment-grade electric utilities in the state, recognizing that investor-owned utilities are a crucial conduit in achieving state energy policy goals. Nonetheless, the state's commitment to a significantly smaller carbon footprint and the substantial changes to the way electricity is produced and delivered is a source of uncertainty in the longer term.

Revenue decoupling, balancing accounts, forward-looking test years and pre-approval of planned capital expenditures greatly reduce regulatory lag, in Fitch's view. The balanced regulatory compact in California mitigates concern regarding PG&E's large capex program. PG&E's capex is expected to approximate $5.3 billion in 2015, $5.3 billion - $5.8 billion 2016 and $5.3 billion - $6.5 billion per annum in 2017 - 2019.

Liquidity at PG&E is solid with approximately $2.1 billion available under the utility's $3 billion credit facility, as of Sept. 30, 2015. In addition, the utility had $62 million of cash and cash equivalents on its balance sheet at the end of the third quarter 2015.

KEY ASSUMPTIONS
--Fitch assumes PCG will fund the $1.6 billion San Bruno penalty entirely with equity.
--Revenues escalate with inflation and reflect anticipated higher GT&S revenues.
--O&M is projected to grow at a 1.7% compound annual rate.
--Capex is projected in excess of $5 billion per annum 2015 and 2016.

RATING SENSITIVITIES
Positive - Future developments that may, individually or collectively, lead to a positive rating action include:

--Favorable resolution of recently initiated CPUC investigations into PG&E's safety culture and natural gas distribution business record keeping;
--Constructive resolution of PG&E's pending GT&S rate case consistent with Fitch's expectations;
--Resolution PCG's natural gas related issues and improvement in earnings and FFO-adjusted gross leverage to better than 4x and 3.4x, respectively, on a sustained basis.

Negative - Future developments that may, individually or collectively, lead to a negative rating action include:

--Significant deterioration to PCG's credit metrics due to more punitive than expected regulatory decisions;
--Adverse outcomes in pending CPUC investigations and/or GT&S rate proceedings;
--Ineffective execution of PG&E's large capex program;
--Competitive inroads from and strong policy support for alternative energy supply are secular challenges for PG&E along with above-industry average retail kilowatt hour rates;
--A decline in projected earnings and FFO leverage ratios to worse than 3.75x and 5x, respectively, on a sustained basis.