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 its commercial paper balance. The Rating Outlook is Stable. PG&E is a wholly-owned operating subsidiary of PG&E Corporation (PCG; Issuer Default Rating 'BBB+'; Rating 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 on April 9, 2015 to adopt penalties and fines as proposed in President 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 of fines and penalties in addition to disallowed pipeline safety costs already incurred brings the total OII penalty to approximately \$2.2 billion. Fitch calculates that PG&E has absorbed approximately \$4.8 billion in unrecoverable San Bruno-related costs during 2011 - 2014 (including the OII penalty).

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 payable to California's General Fund 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 gas transmission and storage (GT&S) rate case (and 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 penalty with equity. This, combined with a reasonable outcome in PG&E's GT&S rate case could trigger future positive rating actions.

However, implementation of the San Bruno penalty is likely to further delay a CPUC decision in PG&E's pending GT&S rate proceeding from this summer to 4Q 2015. In addition, proceedings initiated by the commission to examine and improve PG&E's safety and record keeping practices inject a continuing element of uncertainty, in Fitch's view.

Fitch believes the political/regulatory environment in California is balanced, notwithstanding the highly politicized San Bruno proceedings. 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.

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 \$5.5 billion per annum in 2015 - 2016.

Liquidity at PG&E is solid with approximately \$2.4 billion available under the utility's \$3 billion credit facility, as of March 31, 2015. In addition, \$50 million of cash and cash equivalents on its balance sheet at the end of the first quarter 2015.

KEY ASSUMPTIONS
--Fitch assumes PCG will continue to issue new equity to maintain the utility's 52% statutory equity ratio and fund the \$1.6 billion San Bruno penalty.
--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 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.