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Credit rating agencies weigh in on PG&E decision to suspend dividend

Moody's, S&P Global Ratings and Fitch Ratings are taking a closer look on all the ratings of PG&E Corp. and its utility Pacific Gas and Electric Co., after they announced to suspend their dividend payments.

"We view the decision to suspend the dividends as materially credit negative because it signals how management views the company's potential exposure to the Northern California wildfires," Moody's Senior Analyst Jeff Cassella wrote in a Dec. 22 note.

The suspension covered the common stock dividend of PG&E and the preferred stock dividend of Pacific Gas and Electric. Prior to the suspension, PG&E had a dividend yield of 3.2% for the latest one-year period. This compares to a dividend yield of 3% for Edison International, which also is facing potential regulatory repercussions in California, and 2.9% for NextEra Energy Inc.

As a result of the dividend suspension, Moody's placed the ratings and outlooks of both entities on review for downgrade, affecting more than $17 billion of rated debt. These ratings include PG&E's A3 senior unsecured and its Prime-2 short-term commercial paper ratings, and Pacific Gas and Electric's A2 senior unsecured and its Prime-1 short-term commercial paper ratings.

Moody's previously had a stable ratings outlook on both companies.

The rating agency said the review will focus on the companies' liquidity capacity, potential access to capital, the supportiveness of the regulatory environment, developments on the legislative front and rising risks associated with political intervention.

S&P Global Ratings also placed all of its ratings on both companies, including its A- issuer credit ratings, on CreditWatch negative with negative implications. The agency also downgraded Pacific Gas and Electric's preferred stock to BB from BBB, and placed it on CreditWatch negative.

"While the dividend decision can be viewed as a prudent, proactive attempt to build cash reserves and its equity cushion in case an extreme scenario of unrecoverable wildfire costs emerges that needs to be covered with equity, the action also reduces the company's access to equity capital while dividends are unpaid, thereby reducing its financial flexibility," S&P wrote its Dec. 22 note.

Fitch Ratings, which is yet to take an action on the companies' ratings, said the dividend suspension will result in annual cash retention of over $1 billion. But Fitch also noted that this is somewhat offset by cost of capital concerns in light of pressure on PG&E's shares.

Year to date, PG&E shares saw a 26.9% price drop to close at $44.45 on Dec. 26, based on closing price of $60.77 on Dec. 30, 2016.

Several analysts also downgraded or reassessed ratings for PG&E in light of the decision, which they characterized as being essentially forced on the company due to wildfire liability policies in the state.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.