Investing.com -- Fitch Ratings has placed Edison International (NYSE: EIX ) and Southern California Edison Company (SCE) on Rating Watch Negative (RWN) on May 16, 2025. This action reflects the ongoing high wildfire risk, potential involvement of SCE equipment in the ignition of the Eaton (NYSE: ETN ) Fire, and potential significant depletion of the Assembly Bill (AB) 1054 Wildfire Fund due to expected liabilities related to the Eaton Fire.

The elevated exposure to wildfire liabilities due to the Eaton withdrawals from the Fund significantly increases business risk, which is a credit negative. Pending investigations into the Eaton Fire could result in credit rating downgrades for EIX and SCE if SCE equipment is found to have caused the fire. However, if SCE equipment is found not to have been involved in the ignition of the fire, the companies’ ratings could be affirmed at current levels and removed from the RWN.

The ratings also consider the approved and expected recovery of 2017-2018 wildfire liabilities. Further legislative action to support the liquidity and credit of investor-owned utilities (IOU) will be crucial to prevent further downgrades.

The Eaton Fire, which originated in the Eaton Canyon within SCE’s service territory, burned 14,021 acres, destroyed 9,413 structures, and resulted in 18 fatalities. SCE had de-energized distribution lines but not transmission lines in Eaton Canyon. Investigations are ongoing to determine the cause of the fire, with plaintiff lawyers alleging that the fire began near SCE transmission lines in Eaton Canyon.

If SCE’s equipment is determined to have been involved in the ignition of the Eaton Fire, Fitch expects related third-party liabilities over $1 billion to be funded via withdrawals from the $21 billion AB 1054 Wildfire Fund, with no direct impact on SCE’s or EIX’s balance sheets. However, these withdrawals would significantly reduce the Fund’s capacity to cover future wildfire-related third-party liabilities, leaving SCE and other IOUs participating in the Fund exposed.

The California Public Utilities Commission (CPUC) has approved SCE’s settlement of claims related to the Thomas Fire, Koenigstein Fire, and Montecito Mudslides. The settlement allows recovery of about $1.6 billion of the $2.7 billion of costs initially requested by SCE. SCE is also seeking recovery of $5.4 billion of costs related to the Woolsey Fire. Fitch expects a CPUC decision on this matter in the first half of 2026.

Fitch anticipates that EIX’s and SCE’s credit metrics will improve, averaging 4.9x and 4.2x, respectively, over 2025-2028, compared with 6.9x and 5.5x in 2024. These improvements primarily reflect the authorized and anticipated recovery of 2017-2018 wildfire liabilities and generally supportive regulatory outcomes.

A parent-subsidiary relationship exists between EIX and SCE, with SCE accounting for almost all of EIX’s consolidated earnings and cash flows. If the standalone credit profiles (SCP) of SCE and EIX diverge, Fitch would apply a stronger subsidiary, weaker parent approach, reflecting EIX’s dependence on cash flows from SCE to meet its obligations. In such a scenario, both legal ring fencing and access and control would be deemed by Fitch to be porous, resulting in a maximum two-notch differential in EIX’s and SCE’s Issuer Default Ratings (IDRs).

EIX and SCE face significant credit risk due to the persistent threat of catastrophic wildfires in California. Fitch believes that the Eaton Fire could be a significant setback following lower wildfire destruction from fires involving SCE equipment during 2019-2024 compared with 2017-2018.

Fitch expects EIX’s and SCE’s credit metrics to improve over the period 2025-2028, with an average FFO leverage of 4.9x for EIX and 4.2x for SCE. Factors that could lead to negative rating action or downgrade for both EIX and SCE include a downgrade of SCE due to adverse wildfire-related developments, deteriorating rate regulation, or sustained FFO leverage of greater than 5.0x. Factors that could lead to positive rating action or upgrade for both EIX and SCE include consistent progress in reducing firestorm risk, a record of less destructive utility-triggered wildfires, better than expected regulatory outcomes, and FFO leverage of 4.3x or better on a sustained basis.

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