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S&P downgrades San Diego Gas & Electric on wildfire liability risks

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S&P downgrades San Diego Gas & Electric on wildfire liability risks

S&P Global Ratings on Sept. 5 lowered its issuer credit rating for San Diego Gas & Electric Co. to A- from A, with a negative outlook.

The rating agency said the downgrade was made in light of the "unaddressed longer-term risks associated with inverse condemnation." The legal doctrine of inverse condemnation holds that a utility can be held financially responsible for a wildfire if its assets were the substantial cause of the fire.

On Aug. 31, California legislators approved Senate Bill 901, which reduces the likelihood that utilities will be forced into bankruptcy protection as a result of wildfire damages.

Although the bill allows utilities to apply for cost recovery associated with wildfires, it does not tackle the issue of inverse condemnation.

"The negative outlook reflects the possibility of a downgrade if the severity of the California wildfires persists without a longer-term reform to inverse condemnation, if the company is deemed the cause of a significant 2018 wildfire that leads to material disallowances, or if its stand-alone financial measures weaken such that funds from operations to debt is consistently below 18%," S&P Global Ratings said in a report.

Meanwhile, the rating agency affirmed its issuer credit ratings for San Diego Gas & Electric's, or SDG&E's, parent company Sempra Energy at BBB+, and Southern California Gas Co. at A, both with a negative outlook.

S&P Global Ratings said it placed SDG&E a notch higher than Sempra because of SDG&E's "stand-alone credit profile and the cumulative value of structural and regulatory protections in place insulating SDG&E from its parent."

The rating agency also described SDG&E's management of wildfire mitigation as "exceptional" compared to peers, noting the utility's smaller service territory, and noting if a material fire occurs in its territory, the company has measures in place to support the likelihood of recovering costs from ratepayers.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here and here.