Wildfires can cause extensive damage to utility infrastructure, leading to significant operational and capital expenses. While concerning, the greater worry is the liability associated with wildfires ignited by utility equipment, leading to loss of life and substantial property damages.
Wildfires are an escalating risk for electric utilities, particularly in regions with dry climates and dense vegetation, such as California and other parts of the western United States. These natural disasters have become more frequent and severe due to climate change, forest management practices, and population growth in the wildland urban interface. This situation is placing utilities in a precarious position regarding operational stability, regulatory compliance, and financial health. One of the most critical impacts of wildfires on utilities is the deterioration of credit metrics, which can have long-lasting consequences for access to capital and overall financial viability
Wildfires can cause extensive damage to utility infrastructure, leading to significant operational and capital expenses. While concerning, the greater worry is the liability associated with wildfires ignited by utility equipment, leading to loss of life and substantial property damages. For example, Pacific Gas and Electric (PG&E) faced over $30 billion in liabilities related to wildfires in California from 2015 to 2018, eventually leading the utility to file for bankruptcy in 2019.
These unanticipated costs can severely strain a utility’s balance sheet, increasing debt levels and weakening cash flow. Rating agencies, like Moody’s, Fitch, and S&P Global Ratings, closely monitor these metrics and may downgrade a utility’s credit rating if the company’s financial health deteriorates. As an example, S&P Global Ratings, Industry Credit Outlook stated the following about wildfire impacts:
During 2023 we lowered the ratings on Hawaiian Electric Industries Inc. by multiple notches after the most destructive wildfire in Hawaii’s history, with nearly 100 fatalities and about 2,200 structures damaged or destroyed. Also during 2023, an Oregon jury awarded 17 plaintiffs in a 2020 wildfire-related class action lawsuit against PacifiCorp about $5.3 million per plaintiff, which was materially above our base case of about $1 million per structure. The jury also found that a broader absent class affected by the fires could bring claims against the company. Accordingly, we downgraded PacifiCorp by two notches and revised the outlook to negative.
A lower credit rating makes it more expensive for utilities to borrow money, further exacerbating financial stress. Notably an actual fire is not necessary for a downgrade to occur. Rating agencies are scrutinizing utilities’ relative wildfire risk, financial risk, and the efforts underway to minimize those risks.
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