Executive Summary

• Edison and PG&E stock significantly underperformed in June after SB254 was introduced with a plan to force the utilities to spend $10 bn in wildfire mitigation with no return for shareholders as the capex would be financed with securitization bonds. While utility capex without an ROE component was a shot across the bow to the entire investor-owned-utility (IOU) business, some bondholders said, “this is a shareholder issue”. However, it is very much a bondholder issue as nothing in SB254 did anything to replenish the essentially depleted (from the Eaton fire) AB1054 fund ($21 bn fund less $1 bn spent on Dixie).
• On a much more positive note, behind the scenes management teams are saying they are willing to have shareholders contribute to a new/replenished wildfire fund in exchange for legislative changes to the claims process for future fires. We understand this to mean limiting non-economic damages, which EIX confirmed on its 1Q call the AB1054 fund will pay out (we speculated as much beforehand). Including non-economic damages significantly increases the costs of wildfires, including the January 2025 Eaton fire. This “shareholder equity for a new fund in exchange for claims reform” is all secondhand to us from sell-side reports and client conversations.
• We don’t have any sense of how much traction these management proposals are getting with the legislature and the existing SB254 test doesn’t even hint towards the “shareholder equity for a new fund in exchange for capping non-economic damages” proposals but if it comes to fruition this could be an obvious major positive for bondholders.
• It could be especially positive for PCG since we imagine any new or replenishment mechanism wouldn’t apply to previous fires. In other words, when if/when Eaton fire claims exhaust the AB1054 fund, they will come back to EIX, not the new fund.

SoCalEd preferreds remain notably wide to the holdcos, though their limited liquidity has been frequently cited. There is a possibility—estimated at 25-50%—that rating agencies may downgrade or place opcos on review for downgrade, which could impact market dynamics. Currently, SoCalEd (A2/A-/A- downgrade review) 2035s are at +135, having widened 45 bps since the early January Eaton fire, compared to Duke Carolinas (Aa3/A/NR) 2035s at +60, which have tightened 15 bps over the same period.

Moody’s has a stable outlook on EIX while S&P is negative and Fitch placed the company on Ratings Watch Negative in May.