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PG&E bankruptcy not a credit risk for California, local governments, says Fitch

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PG&E bankruptcy not a credit risk for California, local governments, says Fitch

As PG&E Corp.'s march toward bankruptcy continues, California's government, local governments and publicly owned utilities should not see negative credit impacts, Fitch Ratings said in a Jan. 17 note.

Even in bankruptcy, some of the operations of PG&E Corp.'s utility subsidiary, Pacific Gas and Electric Co., or PG&E, will have to continue business as usual, preserving normalcy to a degree for the state, its municipalities and municipal utilities, Fitch analysts wrote.

Pointing to the utility's 2001-2004 bankruptcy, Fitch said it expects that PG&E will continue serving customers and paying property taxes over the course of the anticipated Chapter 11 bankruptcy proceedings.

But even if the company were to fail to pay property taxes or its assets become non-taxable, PG&E's proportion of municipalities' respective tax bases is relatively small, Fitch said. For the county of San Luis Obispo, Calif., for example, PG&E's fiscal 2018 property taxes were about 2% of government revenues, while in Fresno County, PG&E property taxes contributed about 0.5% of government revenues in fiscal 2017, Fitch said.

The company's 2017 license, permit and franchise fees for fiscal 2017 for San Luis Obispo and Fresno were 2% and 1% of government revenues, respectively, the note added.

For the tax year that ended June 30, 2018, the company paid $461 million in property taxes and $137 million in franchise fees to the 50 counties and 247 cities in which it owns and operates infrastructure throughout the state, Fitch noted.

"Fitch's analysis of the potential impact on the state and local governments indicate minimal threat to revenues and financial operations," Fitch said, suggesting that either PG&E will emerge from bankruptcy and raise rates to cover legal liabilities, or PG&E will not survive the bankruptcy and the state will raise taxes to compensate.

"In either scenario, the increased cost of running the utility would not be enough to affect either the state's ability to remain economically competitive or its credit quality," the note said. "Fitch also does not foresee a meaningful impact on employment or earnings as the utility would continue to function in some form."

For publicly owned utilities, or POUs, credit concerns are minimal in the short to medium term, Fitch said, highlighting the entities' good liquidity and the state's market and operational environment for municipal utilities. Longer term, a PG&E bankruptcy may impact some of these utilities because of the physical interconnections, operational agreements and joint projects they have with the company. Large-scale market volatility and rule changes that could come out of the bankruptcy situation may also affect the POUs, Fitch said.

"However, Fitch views [these factors] as unlikely to significantly impact POU credit ratings," analysts wrote. "At this point, Fitch does not expect potential rule changes to materially affect POU cost of operations."

PG&E Corp. and its utility on Jan. 14 filed a 15-day notice that the companies plan to seek reorganization under Chapter 11. The parent company's market capitalization tanked in the weeks and months leading up to the bankruptcy plan announcement as liabilities related to deadly California wildfires loomed larger.

S&P Global Ratings on Jan. 16 downgraded the issuer credit rating of PG&E to D from CC, after the utility missed a $21.6 million interest payment on $800 million of its 5.4% senior notes due 2040. S&P Ratings also downgraded the short-term rating and commercial paper rating on PG&E to D from C and lowered the issue-level rating on the 5.4% notes to D from CC.

PG&E Corp. and its utility also had their credit ratings cut by all three major rating agencies after the bankruptcy announcement.