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FAQ: Calif Wildfires & Utilities Primer (Jan 2025)
Andy DeVries, CFA - Head of Investment Grade, Head of Utilities
Nick Moglia, CFA - Senior Analyst, Utilities
Diego Espinosa Valdez - Analyst, Utilities
EXECUTIVE SUMMARY
- We provide a Frequently Asked Questions primer for utility investors looking at the potential impact on SoCalEd (parent: EIX), PacGas (PCG) and SDG&E (SRE). SoCalEd and PacGas are the only significant assets of their parent companies while SRE owns significant other assets (Oncor, SoCalGas, SIP) and SDG&E only makes up 25% of total earnings.
- There is a significant amount of debt involved here and we do see ratings risk to all CA utilities IF the Eaton Fire is pinned on EIX equipment and the damages from Eaton significantly deplete the $20 bn AB1054 fund. We address all the conflicting amounts on the size of the fund in this report with $18, $21 and $14.7 (actual balance at 2024YE) all widely cited (including by ourselves).
- PacGas has $59 bn of debt consisting of $12 bn of AAA securitization debt, $42 bn of Baa2/BBB/BBB regulated opco debt and $5.1 bn of holdco debt with the straight bonds at Ba3/BB/BB+ and the Sept issuance of $1 bn of hybrids rated Ba3/B/BB-. EIX has $35 bn of debt consisting of $29 bn of A2/A-/A- regulated opco debt, $1.5 bn of AAA securitization debt and $4.6 bn of holdco debt with the straight debt rated Baa2/BBB-/BBB and holdco hybrids rated Baa3/BB+/BB+. SRE has significantly less exposure with its subsidiaries San Diego Gas & Electric having $8 bn of debt while SoCalGas, which we have a long-standing underperform on, has $7.3 bn of debt.
- Outside the scope of this report, the fires could be a negative for rooftop solar installers as CA was a big market for rooftop solar, and we can’t imagine anybody who lost their home is going to keep making the lease payments. This could have a negative impact on the ABS securities backing those payments, in addition to the holdco exposure. A quick google maps satellite search showed over 20% of the homes had panels. However, these are rich neighborhoods so they might have owned the panels outright, which would mean no exposure.
- Our thoughts and prayers are with all the victims of these tragic fires.
How are utilities exposed to wildfires in California and what is inverse condemnation?
California operates under a very unique legal construct of Inverse Condemnation that results in Strict Liability for utility companies. A utility is on the hook for all property damage, legal fees and fire suppression costs (CalFire) if their equipment merely contributes to a wildfire and there is no need to establish that the utility acted negligently. A simple report from CalFire saying a power line detached and sparked the brush or a tree was leaning on the wires ahead of the fire is all it takes to put the utility at fault.
After the devastating 2017-18 fires that resulted in Pacific Gas & Electric filing bankruptcy in early 2019, there was talk of repealing Inverse Condemnation but instead regulators passed AB1054, which established a $21 bn wildfire fund to pay fire damages.
Alabama is the only other state with Inverse Condemnation / Strict Liability on the books as it relates to utilities but covering utilities for over two decades we’ve never seen a significant (or any) wildfire in Alabama or InvCon claim against Alabama Power.
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