U.S. Markets closed

PG&E Gets Second Junk Grade After Moody's Credit Downgrade

Allison McNeely, Claire Boston and Mark Chediak
PG&E Gets Second Junk Grade After Moody's Credit Downgrade

(Bloomberg) -- Moody’s Investors Service cut PG&E Corp.’s credit rating to junk citing the electric company’s potential wildfire liabilities, a step that will force the company to post cash collateral and move it out of the biggest investment-grade bond index.

The credit grader lowered PG&E’s rating by five notches, to B2 from Baa3, and the utility Pacific Gas & Electric rating four levels to Ba3, according to a statement. The bond grader said it may cut the company further. PG&E’s shares and bonds fell.

Earlier this week, S&P Global Ratings cut PG&E to junk as well. With two junk ratings, PG&E will now be required to use cash as collateral to guarantee power contracts, according to the company’s latest quarterly filing, which estimates the utility will have to fully collateralize as much as $800 million of positions. It had $430 million of cash on its books in September, according to a regulatory filing.

The downgrades underscore how California wildfires have become a political and economic calamity for people and companies in the state. Junk credit ratings will force the company to pay more to borrow, which coupled with collateral costs will further strain a company that may face around $30 billion of liabilities from wildfires.

“We see a much more challenging environment for PG&E,” Moody’s analyst Jeff Cassella said in the statement. “The company is increasingly reliant on extraordinary intervention by legislators and regulators, which may not occur soon enough or be of sufficient magnitude to address these adverse developments.”

PG&E had about $18.4 billion of long-term debt as of September 30. Its most actively-traded debt dropped sharply after the downgrade: Pacific Gas & Electric bonds with coupons of 6.05 percent due in 2034 fell as much as 4.5 cents on the dollar to 85 cents, the lowest level since the financial crisis, according to Trace, the bond price reporting system.

The company’s shares fell as much as 11 percent to to $15.87 in after-hours trading.

(Updates with company’s cash position from third paragraph.)

To contact the reporters on this story: Allison McNeely in New York at amcneely@bloomberg.net;Claire Boston in New York at cboston6@bloomberg.net;Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;Lynn Doan at ldoan6@bloomberg.net, Dan Wilchins

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.