Credit rating agency downgrades SDG&E on wildfire concerns

Jan. 24--A second top credit agency in the past four months has downgraded San Diego Gas & Electric's debt rating, citing the rising risk of catastrophic wildfires and concerns about the massive liability faced by California utilities when their equipment starts a fire.

S&P Global Ratings on Monday lowered SDG&E's credit rating one notch from A- to BBB+. It also cut its rating for Southern California Edison from BBB+ to BBB.

"We could lower our ratings on SDG&E by one or two more notches if regulators and/or politicians do not take concrete steps to explicitly address these growing risks before the start of the 2019 wildfire season," said the S&P Global ratings report.

The S&P downgrade comes after Moody's Investor Services cut credit ratings for the state's top three investor-owned power utilities in September -- SDG&E, SoCal Edison and Pacific Gas & Electric.

Credit agencies are weighing in as California lawmakers and regulators try to figure out how to address the state's wildfire risks while fostering investment in a safe power distribution at reasonable rates for consumers.

Facing $30 billion in liabilities from a half-dozen fires over the past two years -- most notably the deadly Camp Fire in Northern California in November -- Pacific Gas & Electric is expected to file for bankruptcy perhaps as early as next week.

The pending bankruptcy loomed over S&P Global's move to downgrade the credit ratings of SDG&E and SoCal Edison.

"The swift deterioration of PG&E's financial health only heightens the uncertainties facing all of California's other electrical utilities," said the credit rating agency in a report.

PG&E arranged $5.5 billion in debtor-in-possession financing from banks on Monday to pay for its operations during Chapter 11 reorganization, which could take two years. Its debt now has a junk rating.

Even with the downgrade, SDG&E and SoCal Edison have solid credit ratings. Still, the move likely will result in higher borrowing costs, which may lead to higher electricity rates over time.

The increased credit risk surrounding California's power utilities stems in part from the threat of climate change sparking ever more frequent catastrophic wildfires, according to S&P Global.

In addition, California regulators have interpreted the legal doctrine known as "inverse condemnation" to mean that utilities can be held liable for damages caused by wildfires linked to their equipment -- even if the companies followed accepted safety procedures.

"This effectively makes California utilities the insurer of last resort every time there is a devastating wildfire in their service territory," according to the S&P Global.

Before utilities can pass wildfire costs onto ratepayers, they must get approval from the California Public Utility Commission. As part of its justification for potentially filing for bankruptcy, PG&E said it didn't expect the CPUC to permit the company to issue debt to cover wildfire claims quickly -- saying it could take years to get authorization.

PG&E has a less than stellar safety record. A judge is supervising the utility's probation term imposed in 2017 after PG&E was convicted of felony charges in connection with the 2010 San Bruno natural gas pipeline disaster, which killed eight.

In addition, Cal Fire blamed PG&E equipment for a dozen 2017 Northern California fires and is investigating whether a faulty transmission tower was the cause of the Camp Fire in November that killed 86 people.

Since the 2007 catastrophic fires in San Diego County that killed two people, destroyed more than 1,300 homes and forced more than 10,000 to seek shelter at Qualcomm Stadium, SDG&E has spent more than $1 billion on fire safety. The measures, funded by ratepayers, include putting more power lines underground, replacing wooden power poles with flame-resistant steel poles, creating the nation's largest utility-owned weather network in fire-prone areas, installing cameras in dangerous areas and bringing the 2,650 gallon Aircrane Helitanker to the region.

"While we assess SDG&E's operational management of wildfire mitigation as exceptional compared with that of its peers, the company is not immune to wildfire risks and our assessment of the insufficient regulatory protection to deal with the unique risks of inverse condemnation," said the rating agency.

The downgrades of SDG&E and SoCal Edison could encourage the state legislature to take up the complex issue.

"Southern California Edison continues to actively engage with state leaders to develop comprehensive public policies to address statewide wildfire mitigation and liability reform," said SoCal Edison in a statement. "Clearly, changes need to be made."

For now, however, there seems to be little support to ease wildfire liability for utilities by tweaking inverse condemnation, which would be seen as a bailout.

"I am very upset that Wall Street firms are trying to blackmail California into doing their bidding. That is what these downgrades are for," said Mark Toney, executive director of The Utility Reform Network, an advocacy group. "The downgrades of these other companies are meant to create more pressure on the legislature to take action" on inverse condemnation.

Toney said his organization supports legislation that would provide protection to people whether a wildfire was started by utility equipment or not. He pointed to Florida's Hurricane Catastrophe Fund, which provides reimbursements to insurers for a portion of their losses in cases of severe hurricane losses.

State Assemblyman Chad Mayes, R-Yucca Valley, has put forward a bill -- AB 235 -- that would create a California Wildfire Fund Authority, which would create a fund to provide coverage when wildfire costs exceed available insurance.

SDG&E urged state lawmakers and regulators to work toward wildfire and liability reform.

"Without an updated legislative, legal and regulatory framework to address wildfire liabilities, the impacts will likely further compromise the financial health of our state," said a company spokeswoman in a statement.

Shares of Sempra Energy, SDG&E's parent company, ended trading Wednesday up 54 cents at $112.91 on the New York Stock Exchange.

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