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Investing.com -- Edison International (NYSE:EIX) and its subsidiary Southern California Edison Co. (SCE) have had their outlooks revised to negative from stable due to potential risk for the California wildfire fund’s depletion. This change, however, does not affect their ’BBB’ issuer credit ratings. The announcement came on Feb. 3, 2025, from S&P Global Ratings.
The revision was triggered by SCE’s interim update to the California Public Utilities Commission (CPUC) on Jan. 27, 2025, regarding the Eaton (NYSE:ETN) wildfire event that took place in early January. SCE’s preliminary analysis indicates that a fault detected on a distant line at some of its substations caused a temporary increase in the current on SCE’s transmission system, including on four energized lines. This increase remained within SCE’s design limits and did not trigger system protection on the lines.
The Los Angeles County Fire Department, leading the investigation of the Eaton fire’s origin and cause, has identified a preliminary area of origin where SCE has three transmission towers. The California Department of Forestry and Fire Protection (Cal Fire) has reported that the Eaton fire destroyed over 9,000 structures, damaged over 1,000 more, and resulted in 17 fatalities. The fire, which is 99% contained, burned over 14,000 acres, making it far more destructive than the 2017/2018 wildfires in SCE’s service territory.
The negative outlooks on Edison and SCE reflect the potential for significant depletion of the California wildfire fund due to the extensive damage caused by the Eaton fire and the possibility that SCE’s equipment may be linked to the fire. The outlooks also suggest a potentially more challenging operating environment for Edison and SCE due to wildfire risk, which could weaken their credit quality.
S&P Global Ratings’ analysis of two previous fires in SCE’s history, the Thomas and Woolsey fires, indicates that the potential liabilities related to the Eaton fire could be substantial. If SCE is found to have contributed to the wildfire, third parties could file significant claims against the utility due to California’s inverse condemnation doctrine. This doctrine holds a California utility financially responsible for a wildfire if its facilities were a contributing cause of the fire, regardless of negligence.
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. If the fund is depleted, SCE loses the credit benefit of using the fund as a source of liquidity and more importantly, loses the credit protection of the liability cap. As the wildfire fund materially declines, Edison and SCE’s credit quality could become more exposed to risk.
The CPUC’s approval of SCE’s settlement agreement with the California Public Advocates Office on its cost recovery application related to the 2017/2018 Thomas Fire, Koenigstein Fire, and Montecito Mudslides (TKM) events is considered positive for Edison’s credit quality. SCE will be authorized to recover 60%, or approximately $1.6 billion of approximately $2.7 billion of losses incurred related to these events and will seek to recover such amounts by issuing securitized bonds.
Edison’s business risk profile remains strong, reflecting the company’s larger size, lower-risk, rate-regulated electric utility business, and effective regulatory risk management. On the other hand, Edison’s financial risk profile is assessed as significant, with the company’s financial measures expected to reflect FFO to debt of 16%-18% for the 2025-2027 period.
The ratings on Edison and SCE could be lowered over the next 12 to 24 months if Edison’s consolidated financial measures weaken, reflecting FFO to debt of less than 14%; or if the California’s wildfire fund depletes at an accelerated pace without sufficient countermeasures; or if the company’s wildfire mitigation strategies are deemed insufficient to consistently protect the company against severe wildfire losses. The ratings outlook could be revised back to stable if the wildfire fund is confirmed to be sufficient to support Edison’s credit quality, and the company maintains consolidated FFO to debt consistently above 14% without an increase in business risk.
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