Southern California Edison Bonds Widen Amid Wildfires in LA Area

The recent wildfires in the Los Angeles area have had a significant impact on the creditworthiness of Southern California Edison (SCE), a subsidiary of Edison International. The Thomas and Woolsey wildfires in 2017 and 2018, respectively, have resulted in substantial financial losses for SCE, leading to a series of write-downs and increased insurance costs. In its most recent earnings report, Edison revised its estimate of the combined claims costs for both wildfires to a new total of roughly $9.4 billion, with more than 90% of those claims expected to be resolved by the end of this year. Edison plans to seek California Public Utility Commission approval to pass roughly $6.4 billion of that cost on to its ratepayers over the next several years. The company has already recovered some $2.4 billion of that $9.4 billion cost from its insurers and the Federal Energy Regulatory Commission.

These financial impacts, along with the need to invest in grid-hardening efforts to prevent future wildfires, have put pressure on SCE's creditworthiness. However, Fitch Ratings has given a stable rating outlook for Edison's plan to issue and refinance bonds, citing the resolution of wildfire liabilities and SCE's progress in strengthening the grid's fire resilience. The utility has made meaningful progress in its efforts to harden the grid against wildfire risks, with 76% of high-fire-risk distribution wires already hardened as of the end of last year, and expects to reach 90% by the end of next year.

Despite these efforts, the ongoing wildfire threat and the associated financial risks have led to a widening of SCE's bond yields. Investors have been increasingly cautious about the utility's ability to manage these risks and maintain its financial stability. The recent hearing at the California Public Utilities Commission (CPUC) regarding SoCal Edison's request for a rate increase and approval to buy another $1 billion of wildfire liability insurance protection highlights the ongoing challenges faced by the utility in addressing these issues.



In response to these challenges, SoCal Edison has proposed to use alternative risk transfer instruments, such as catastrophe bonds, in order to secure its needed wildfire liability insurance protection. The utility would only consider using catastrophe bonds if they could fill capacity at a lower cost than market-priced insurance and reinsurance or if no such capacity were available from the traditional markets. The CPUC has recognized the potential benefits of alternative risk transfer instruments in managing wildfire risks, but has also emphasized the need for SoCal Edison to justify any excess costs associated with their usage.

As the wildfire threat continues to evolve, investors will need to closely monitor the financial health and risk management strategies of utilities like Southern California Edison. The ongoing resolution of wildfire-related claims and the utility's progress in grid-hardening efforts will be crucial factors in determining the long-term stability of SCE's bonds and the company's ability to pass on wildfire-related costs to ratepayers.