Passage of wildfire liability bill leads to upgrade for SDG&E from credit ratings agency

San Diego Union-Tribune (CA)

Jul. 30--One of the driving factors behind the passage of Assembly Bill 1054 -- the wildfire liability legislation that zipped through the Legislature and signed into law by Gov. Gavin Newsom -- centered on the threat of another round of credit downgrades for the state's big three investor-owned utilities.

Although the ratings agencies' comments indicate caution, it looks like Wall Street is responding as the bill's supporters hoped.

Moody's late Monday announced it has changed the outlook for San Diego Gas & Electric from negative to positive and affirmed, rather than downgraded, SDG&E's credit rating.

Moody's also improved the outlook for Southern California Edison from negative to stable. Moody's did not downgrade Edison, known as SCE, keeping its credit rating two notches above junk. By comparison, SDG&E's credit rating of Baaa1 is three notches above junk status.

Moody's has no ratings or outlook for the state's third largest investor-owned utility, Pacific Gas & Electric, because PG&E is going through bankruptcy proceedings.

The moves come just days after all three companies committed to take part in a new $21 billion wildfire insurance fund the utilities can access if a future wildfire is started by their equipment.

"It is notoriously difficult to model wildfire risk because it is hard to quantify the effects of weather, climate change and the utilities' risk mitigation measures," Moody's said in its analysis of SDG&E. "Nonetheless, we believe the insurance fund will be large enough to cover all but the most extreme downside scenarios over the next decade."

The ratings agency Fitch has not issued a report on SDG&E since the passage of AB 1054 but on Fitch revised SCE's outlook on Monday from negative to stable while maintaining SCE's credit rating.

Similarly, S&P Global Ratings last Friday took SCE and its parent company, Edison International, off credit watch and did not downgrade them. S&P Global on July 15 maintained a negative outlook for SDG&E's parent company, Sempra Energy, until the utility completes the regulatory steps to "benefit from the credit-supportive measures within AB 1054."

Going forward, though, the ratings agencies seem to be taking a wait-and-see attitude.

Moody's, for example, said failure to "successfully implement" the new law and its provision for a first-in-the-state insurance fund "would likely trigger negative action." And, of course, more catastrophic wildfires and depletion of the fund would lead to downgrades.

Lower credit ratings increase the utilities' cost of borrowing, which is passed on to customers.

AB 1054 "certainly helps with the investment landscape for the utilities in the state," said Andy Smith, a senior analyst who follows utilities for Edward Jones. "It helps with the financial security of the utilities and therefore it's not really surprising to see them getting credit upgrades at this point."

In an email, SDG&E president Scott Drury said the utility was "pleased" with Moody's decision, saying it was "a reflection of our robust and effective wildfire prevention initiatives, as well as our timely decision to participate in the provisions of the wildfire fund established under Assembly Bill 1054."

After the 2007 Witch, Guejito and Rice fires destroyed more than 1,300 homes, killed two people, injured 40 firefighters and forced more than 10,000 to seek shelter at Qualcomm Stadium, SDG&E has spent about $1.5 billion in ratepayer funds on programs to fight and prevent wildfires in its service territory.

Under AB 1054, the utilities can only access the wildfire insurance fund if they receive a safety certification from the state. To get the certificates, the power companies must tie executive compensation to safety performance, establish a wildfire safety committee on their respective boards and meet other financial and safety measures.

SDG&E and SCE received their initial certifications last Friday.

The money going into the $21 billion fund would be split equally between the utilities and the state's ratepayers.

For the power companies, allocation will be based on the proportion of high fire-threat districts in each utility's service territory, the miles of transmission and distribution lines in those high-risk areas and each company's fire prevention efforts. SDG&E's share is 4.3 percent, or about $450 million, while SCE's portion is 31.5 percent, and PG&E's is 64.2 percent.

Under AB 1054, PG&E must exit bankruptcy proceedings by the end of next June to access the wildfire fund.

The $10.5 billion from ratepayers will come by extending a bond issued through the state's Department of Water Resources. The bond was about to expire but under AB 1054, the $2.50 monthly surcharge to ratepayers across the state remains in effect.

Critics of the new law say it was rushed through the Legislature and amounted to a bailout of the utilities, PG&E in particular. According to Cal Fire investigations, PG&E equipment ignited the 2018 Camp Fire that killed 85 people and destroyed nearly 19,000 structures.

San Diego attorneys Michael Aguirre and Maria Severson have filed a lawsuit in federal court, looking to stop the implementation of AB 1054. Among the arguments, the suit says the $2.50 monthly surcharge amounts to an illegal taking from ratepayers that violates the U.S. and California constitutions.

The increasing number and intensity of wildfires in California have turned fire season in the Golden State into a practically year-round event. According to Cal Fire's list of the 10 most destructive fires in state history, seven of them have occurred since 2015. Six of the 10 have occurred in just the past two years.

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