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S&P downgrades SDG&E, SoCalEd, Edison International on wildfire, climate risk

S&P Global Ratings on Jan. 21 downgraded Edison International, its subsidiary Southern California Edison Co. and San Diego Gas & Electric Co. to reflect that the companies "will continue to experience catastrophic wildfires because of climate change and without sufficient regulatory protections due to California's common law application of the legal doctrine of inverse condemnation."

S&P Global Ratings lowered the issuer credit rating of SoCalEd and Edison International to BBB from BBB+. Additionally, Edison International's unsecured debt was downgraded to BBB- from BBB, and SoCalEd's unsecured debt was downgraded to BBB from BBB+, its secured debt to A- from A and its preferred stock to BB+ from BBB-, with all ratings on CreditWatch with negative implications.

For SDG&E, S&P Global Ratings lowered its long-term issuer credit rating and issue-level rating on unsecured debt to BBB+ from A-. The rating agency also revised its assessment of SDG&E's business risk profile to "strong" from "excellent" and reassessed but did not change the utility's relationship to parent company Sempra Energy.

Citing California utilities' exposure to wildfires, the rating agency described Senate Bill 901 as a first step to protect the credit quality of utilities but called for further reform to help shield the companies from the risks of the state's unique inverse condemnation policy.

PG&E Corp. and its utility Pacific Gas and Electric Co. announced plans Jan. 14 to file for reorganization under Chapter 11 bankruptcy law. "[T]he swift deterioration of PG&E's financial health only heightens the uncertainties facing all of California's other electric utilities," S&P Global Ratings analysts wrote.

For SoCalEd and Edison International, S&P Global Ratings expects annual capital spending of approximately $5 billion, $800 million in annual dividends, a base rate increase, potential contingent liabilities, tax reform, and continued Federal Energy Regulatory Commission formula rates. The rating agency anticipates a funds from operations-to-debt ratio in the range of 16% to 18%.

For SDG&E, S&P Global Ratings expects continued "robust" annual capital spending averaging more than $1.2 billion, continued rate-case increases and attrition rates, tax reform, above-average customer growth, and a funds from operations-to-debt ratio of about 20%.

"We now believe that if there is a catastrophic wildfire in SDG&E's service territory, and the utility is identified as the cause of the fire, Sempra's support would be limited to protect its other investments," S&P Global Ratings analysts wrote.

S&P Global Ratings said it could downgrade the ratings on SDG&E, SoCalEd and Edison International further if lawmakers and regulators do not take concrete steps to address the financial risks facing the companies.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. 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.