SoCal Edison gets negative outlook from S&P amid wildfires

S&P Global Ratings revised the outlook to negative from stable on Edison International and Southern California Edison based on the potential risk of depletion of the wildfire bond fund created by California lawmakers to bail out utilities facing wildfire liability risk.

S&P affirmed the BBB issuer credit ratings on the parent company and the SoCal subsidiary’s debt.

“Overall, while the investigations are ongoing, we believe that the California wildfire fund, designed as a material source of liquidity and financial support for participating California investor-owned utility is at risk of a material depletion,” S&P analysts wrote in the report.

The outlook “reflects the number of structures that have been damaged or destroyed (over 10,000) due to the Eaton fire, and the possibility that SCE’s equipment may be linked to the fire,” S&P analysts wrote.

In addition, S&P said it “analyzed cases from two previous fires in SCE’s history (Thomas & Woolsey) which occurred around the 2017/2018 period, looking at several factors such as the number of structures damaged or destroyed, the total number of plaintiffs involved in those cases, the total amount of damages demanded by claimants, and the total amount paid by SCE to settle claims.”

“Our preliminary analysis indicates that the value of potential liabilities related to the Eaton fire could be significant,” S&P analysts wrote.

SoCal Edison is a corporate entity, but has $752 million of municipal debt outstanding, issued via conduit, according to a Tuesday investor note from JPMorgan strategists led by Peter DeGroot. The municipal bonds are rated A2/A-minus/A-minus by Moody’s Ratings/S&P/Fitch Ratings, in line with the investor-owned utility’s senior secured corporate debt, JPMorgan strategists wrote, adding the municipal debt does not technically carry an outlook.

The seed money for the $21 billion bond fund, established in 2019, came from up to $10.5 billion in Department of Water Resources bonds to be matched with $10.5 billion from the utilities. It was established to act as a line of credit for utilities to cover wildfire damages and limit the financial obligations of ratepayers.

The Los Angeles County Fire Department, the lead agency investigating the cause of the Eaton fire identified a preliminary area of origin where SCE has three transmission towers, S&P analysts wrote in the report.

“SCE’s preliminary analysis shows that a fault detected on a geographically distant line at certain of its substations caused a momentary and expected increase in the current on SCE’s transmission system, including on four energized lines, even though such increases remained within SCE’s design limits, not triggering system protection on the lines,” S&P analysts wrote.

Furthermore, S&P said, the California Department of Forestry and Fire Protection (Cal Fire) has confirmed that the Eaton fire (99% contained) burned over 14,000 acres, destroyed over 9,000 structures, damaged over 1,000 structures, and resulted in 17 fatalities, making this fire far more destructive than the 2017/2018 wildfires which occurred in SCE’s service territory.

“We note that the investigations are ongoing, and SCE has not been determined to be the cause of the Eaton wildfire,” S&P analysts wrote.

“That said, if SCE is found to have contributed to the wildfire, third parties would likely file significant claims against the utility because of the inverse condemnation doctrine in California — whereby a California utility can be financially responsible for a wildfire if its facilities were a contributing cause of the fire irrespective of negligence, putting the sufficiency of the fund at risk,” S&P analysts wrote.

S&P analysts also noted “the $21 billion wildfire fund does not have an automatic replenishing mechanism and is fully available to other participating California investor-owned utilities, including Pacific Gas & Electric and San Diego Gas & Electric.”