Liability Claims, Revenue Disruptions Could Lead to Negative Rating Actions
Rapidly expanding wildfires in the Los Angeles area might pose significant financial and operational risks for rated entities, especially if not-for-profit electric utilities' infrastructure triggered the fires. S&P Global Ratings is monitoring rated U.S. public finance entities in the affected region to assess whether liability claims or disrupted revenues will lead to negative rating actions.
As of publication time, the two largest wildfires in the area have burned almost 28,000 acres, remain completely uncontained, and their causes are undetermined. Many entities we rate, including not-for-profit electric and water and sewer utilities, local governments, and school districts, have assets and tax bases in the areas with active fires.
What's happening
Several wildfires sparked in the Los Angeles area on Jan. 7 and into Jan 8, then spread rapidly due to severe winds, low humidity, and extremely combustible terrain. Although only about 1% of Los Angeles County's total 2.6 million acres has burned, the affected area contains a broad range of homes and businesses with variable property values, including some very-high-value real estate. The Palisades Fire is already the most destructive to ever occur in Los Angeles County, according to CalFire. More than 2,000 structures have burned, the Los Angeles Times reported.
The wildfires have led to at least five deaths so far, as well as significant structural damage and destruction, and numerous power outages within the service territories of the Los Angeles Department of Water and Power, Southern California Edison, Clean Power Alliance, Glendale, Burbank, and Pasadena (for more information on Southern California Edison, see our tear sheet, published Jan. 8, 2025, on RatingsDirect). The unregulated generation portfolios (outside of U.S. public finance) of entities rated by S&P Global Ratings appear to be unaffected so far.
The prospects for near-term containment appear dim, given the continued windy conditions, difficult terrain, and the geographic breadth of the fires, which make firefighting progress extremely dangerous and challenging. Water-supply limitations have also been reported. Evacuation orders are widespread both within and outside the burn areas and include densely populated neighborhoods such as Santa Monica and Hollywood Hills.
| Affected not-for-profit electric utilities selected data | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Los Angeles Department of Water | Burbank Water & Power | Glendale Water & Power | Pasadena Water & Power | Clean Power Alliance | ||||||||
| Rating/Outlook | AA-/Stable | AA-/Negative | A+/Stable | AA/Stable | A-/Stable | |||||||
| Total electric utility customers tracked by Poweroutage.us.* | 1.6 million | 51,000 | 93,887 | 65,000 | 1.07 million | |||||||
| Electric utility power outages as of Jan. 8, 2025, 10:50AM Pacific* | 157,745 | 20,158 | 12,384 | 2,622 | N/A† | |||||||
| Percent of electric utility customers with outages as of Jan. 8, 2025, 10:50AM Pacific | 10% | 40% | 13% | 4% | N/A | |||||||
| Financial data as of fiscal year ending | 6/30/2024 | 6/30/2024 | 6/30/2024 | 6/30/2024 | 6/30/2024 | |||||||
| Gross revenues | $5.4 billion | $213.8 million | $294.6 million | $292.0 million | $1.36 billion | |||||||
| Total available liquidity | $2.17 billion | $181.8 million | $285.8 million | $337.2 million | $688.5 million | |||||||
| Days of operating expenses liquidity | 214 | 377 | 468 | 681 | 199 | |||||||
| Wildfire liability insurance coverage | $205.5 million§ | $55 million** | $25 million | Not available | $0‡ | |||||||
| *Source: Poweroutage.us. § As indicated in our analysis published Nov. 4, 2024, LADWP is also pursuing a catastrophe (CAT) bond issue of at least $50 million with an attachment point at $100 million, and has an additional $232.5 million in a self-insurance fund specific to the power system but not specific to wildfire losses. ‡Clean Power Alliance does not own any generation, transmission, or distribution assets. †Clean Power Alliance's customers are served by Southern California Edison's (SCE) distribution network. SCE reported 196,587 outages as of Jan. 8, 2025, 10:50AM Pacific. **General liability insurance, not specifically for wildfire liabilities. N/A--Not applicable. | ||||||||||||
Why it matters
In our view, credit risk for not-for-profit electric utilities could result from wildfires due to the potential for significant liabilities. California courts' strict liability "inverse condemnation" doctrine allows for a utility to be held liable for wildfire damage whether or not negligence contributed to the fire. Not-for-profit electric utilities' overhead power lines and other infrastructure are susceptible to sparking fires during severe weather, particularly wind events. These characteristics distinguish not-for-profit electric utilities from other service providers in terms of operational exposures and credit implications, although the extent to which the fires cause significant damage to structures and infrastructure in highly populated areas could also affect taxable values and revenue, as well as expenditures, for other rated public finance entities.
In California, exposure to wildfires is elevated due to the region's frequent droughts and susceptibility to severe winds, and the wildfire season in the state has evolved into a year-round phenomenon. The City of Los Angeles reported just 0.16 inches of rain since May 6 after a period of wetter-than-normal weather. This allowed vegetation to flourish, only to die out and fuel these wildfires.
What comes next
We continue to monitor the investigations into the causes of this week's wildfires, progress in containing them, damage estimates, power-outage implications, and the resulting financial and operational effects for entities in the area rated by S&P Global Ratings. If investigators determine that not-for-profit electric utilities contributed to ignition, we will assess the adequacy of balance-sheet liquidity and insurance coverage. For affected area issuers that aren't implicated in igniting the fires, we will assess the effects of revenue-stream disruptions on credit quality. We're monitoring the effects and longer-term credit implications for rated issuers across all of U.S. public finance and will continue to assess how the increasing prevalence and severity of wildfire events influences our credit analysis of regional ratings, including consideration of the efficacy of resilience and adaptation measures.
This report does not constitute a rating action.
| Primary Credit Analyst: | Paul J Dyson, Austin + 1 (415) 371 5079; paul.dyson@spglobal.com |
| Secondary Contacts: | David N Bodek, New York + 1 (212) 438 7969; david.bodek@spglobal.com |
| Tiffany Tribbitt, New York + 1 (212) 438 8218; Tiffany.Tribbitt@spglobal.com | |
| Stephanie Linnet, Englewood + 303-721-4393; Stephanie.Linnet@spglobal.com |
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