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Extreme weather, natural disasters may affect energy sector credit, Fitch says

Natural disasters and extreme weather are increasingly affecting U.S. energy infrastructure operators, with possible ramifications for their financial performance, Fitch Ratings warned.

"Extreme weather events such as hurricanes and flooding, as well as natural disasters such as wildfires, earthquakes and volcano eruptions, are occurring with increasing regularity," Fitch analysts Gregory Remec and Terry Pratt said in a Dec. 12 note. "While typically insurable, consequences of such events may not be fully mitigated, and increased frequency or severity could negatively affect energy sector project credit quality."

The note highlighted the potential for "another active hurricane season" along the Gulf Coast to disrupt liquefied natural gas export terminal building, causing delays and cutting into liquidity. On the West Coast, devastating wildfires put California utilities — and their investors — at risk for significant financial liabilities, imperiling the companies' solvency, the note said.

Climate change risks have already become an important part of U.S. utilities' disclosures to shareholders in the past decade, with major storms driving home the need to upgrade and protect infrastructure.

Energy sector infrastructure operators have also increasingly had to prepare for the effects of dangerously shifting weather patterns. The changing climate can raise the potential for extreme inland precipitation and flooding, high winds, and wildfires, among other natural threats to infrastructure.

Trees uprooted by extreme events can wrench the ground around buried pipelines, disrupting the earth that supports them. During heavy rains and floods, flowing debris, turbulent waters and sediment disruption at river and stream crossings can damage the pipes' protective shields. Even droughts can destabilize the ground, causing sinks and fissures that can compromise pipelines' stability.

Not all natural risks to energy infrastructure are climate-related, the Fitch note added. A recent volcanic eruption in Hawaii damaged a baseload geothermal power facility. The destruction cut into the operator's reserve margins and required more thermal units to be dispatched.