Ratings analysts don't think the pending bankruptcy of California's investor-owned PG&E Corporation will greatly stress the state and local governments.
The corporation, which owns the Pacific Gas & Electric utility, announced Monday it would file for Chapter 11 bankruptcy protection in two weeks in the face of estimates upward of $30 billion in legal liability for deadly wildfires sparked by its equipment.
Analysts evaluated the likelihood that the utility would pay property taxes to the counties in which it operates, in addition to assessing whether it would make payments on its bond debt.
Fitch Ratings downgraded PG&E’s long-term issuer default rating to C from BBB-minus after the company announced on Monday it planned to restructure its debts through bankruptcy. Moody’s Investors Service downgraded PG&E to Caa3 from Ba3.
S&P Global Ratings had downgraded PG&E five notches to B a week before the bankruptcy announcement, but has since lowered the ratings to D after they missed the $21.6 million interest payment on its $800 million 5.4% senior notes maturing on Jan. 15, 2040. There is a 30-day grace period, before default is triggered.
The utility has issued close to a billion dollars in bank-backed municipal bond debt through state conduit issuers, the California Pollution Control Authority and the California Infrastructure & Economic Development Bank.
CPCFA acted as a conduit issuer on $614 million for Series 1996 C, E, F and 1997 B bonds and $149 million for Series 2009A and B, according to the company’s third quarter 2018 10Q. PG&E has $249.4 million of principal outstanding on the four series issued through I-Bank from 2008 to 2010, according to Fariba Khoie, I-Bank’s bond financing unit manager.
The State of California, local governments and the public-owned credits may withstand the stress from PG&E's bankruptcy, Fitch Ratings said, because the utility will probably continue to operate as it did when it went through a Chapter 11 bankruptcy restructuring in the early 2000s after it was caught up in a power supply crisis.
“Our assumption is that they will continue to provide service, just as they did when they were in bankruptcy from 2001 to 2004,” said Kathy Masterson, a senior director in Fitch Ratings.
The utility provides power to about 16 million gas and electric customers in northern and central California and is among the largest taxpayers in several cities and counties that Fitch rates.
PG&E made property tax payments totaling $462 million to 50 counties in fiscal 2018, according to S&P, which like Fitch said the impact should be minimal for most counties.
S&P said it rates 32 of the 50 counties that receive tax payments from the utility, including the 10 counties with the largest property tax payments.
Though S&P doesn’t foresee any major credit effects from delayed property tax payments, in five of the counties it rates, tax payments from PG&E in 2018 represent more than 5% of general fund revenues. Those counties are San Luis Obispo, Fresno, Solano, Tehama and Yuba.
Property taxes are made in two roughly equal installments in December and April. S&P said it will be monitoring the affected counties to determine whether any delays in full and timely tax payment result in any adverse credit effects.
The decision would rest with the bankruptcy court, but S&P said that PG&E was allowed to continue making property tax payments during its 2001 bankruptcy.
Moody’s also downgraded to Aa3 from Aa1 the long-term joint support letter of credit-backed ratings of the $150 million Series 2009A and Series 2009B issued through the I-Bank. The short-term VMIG 1 rating remains unchanged. That is the only letter of credit rated on the utility's muni debt that Moody rates.
The ratings based on a joint letter can sometimes be higher than the banks' rating, which was the case with this debt, said Joan Hempel, a Moody’s vice president-senior credit officer.
“When you have a joint borrower like PG&E and MUFG Union Bank, you can get a rating above the bank rating,” Hempel said. “They were previously rated slight above Union Bank, but because of the PG&E downgrade, the rating has been lowered to the rating of MUFG Union Bank.”
A bank letter of credit means the bank has an irrevocable and unconditional obligation to make the payments directly to the bondholders, Hempel said. The bank then has a reimbursement agreement under which PG&E agrees to pay the bank. So the bondholders look to the bank as the first source of payment of the bonds, she said.
