Pacific Gas & Electric Co. is sponsoring an $860 million issuance of senior secured recovery bonds to recover funds that it spent on wildfire risk mitigation, after the California Public Utilities Commission approved such spending. PG&E Recovery Funding LLC is the first if its kind for PG&E.
The CPUC approved an issuance amount of $1.2 billion, which PG&E believes would save taxpayers $633 million, according to Moody’s Investors Service, which intends to assign ratings to three classes of notes.
Both Moody’s and S&P expect to assign ‘Aaa’ ratings to the notes.
The securitization is backed by an irrevocable financing order that empowers the issuer to impose, collect and receive fixed recovery charges (FRC), which cannot be bypassed. In this case, the charges will be based on electricity usage from all retail customers within PG&E’s service area, except for consumers enrolled in the California Alternative Rate for Energy or Family Electric Rate Assistance programs. Together those customers represent less than 12% of PG&E’s annual retail electric sales for 2016-2020. The financing order also allows the trust to adjust the fixed recovery charges to ensure that bonds are paid on time, and are eventually paid in full.
PG&E was able to put the financing order in place after the California legislature enacted AB 1054, which amended the California Public Utilities Code and provided the framework for the securitization. The legislation, also called the Wildfire Financing Law, established a $21 billion wildfire fund that provides liquidity to help utilities pay claims to wildfire victims.
Moody’s notes that the financing order and the statutory uncapped true-up adjustment mechanism are key credit strengths of the deal. PG&E will service the payments on the recovery bonds, which is considered a credit strength, because it is highly stable and experienced. Other credit strengths include the low fixed recovery charge, and a large and diversified ratepayer base.
To the deal’s credit, it benefits from a large service territory with a population of approximately 10 million residents and around 5.5 million retail electric customers, Moody’s notes. These two groups will form the base from which the FRC will be collected.
S&P Global Ratings, which also expects to assign ratings to the notes, says the transaction benefits from an excess funds subaccount that is funded with collected finds remaining after the bondholders and other transaction participants have been paid. The excess funds subaccount will also be available to make payments on the recovery bonds.
Previously, PG&E has regularly issued investment grade corporate debt since 2016, and about $2 billion in high-yield corporate debt.
