Idiosyncrasies of Credit Risk in US Utilities

In partnership with Capital Group, [i3] hosted a webinar to discuss US utilities within the global corporate bond sector.

Risk of Wildfires

The 2020 California wildfire season is the largest and most severe on record in terms of burnt area with about 4 million acres, double the acreage burnt in 2018, the state’s second-worst wildfire season in history. This led to billions of dollars of damages, presenting significant risks to the utilities sector.

However that is potentially matched by a corresponding commitment by major US utilities to upgrade their infrastructure, asset management and risk mitigation capabilities.

Impact on US Utilities

With 2 decades of experience investing in US corporate bond markets, Karen Choi shared her overall perspectives on the market and then did a deep dive into US utilities. In particular, she focused on the impact of the wildfires in California, climate change implications and the fundamental underpinnings of the sector.

Transcript (with timings)

3.41      An overall outlook on US Investment Grade Corporate Bonds and how this has changed over recent times.

5:50      Interest rate risk is quite different at the moment to previous years.

7:52      How do we connect the dots between wildfires and the utilities sectors?

8:21      Why is the sector risk different in California to the other US states?

11:08    In 2017, a commissioner made a decision for one of the utilities companies to not be able to recover the costs related to a wildfire, and that one decision changed investability in the sector.

11:32    Legislation was introduced subsequently but that in itself caused issues in 2018 – when there was one of the most catastrophic fire seasons.

12:14    One company went into bankruptcy as a result – twice.  Bond prices suffered but buying them was still a good investment decision.

14:10    What was the downside risk?

15:03    How can the utility companies be deemed liable for the fires?

16:23    What does engagement look like in this scenario?

20:12    Has the engagement meant utilities companies are still liable?  What is the ‘Wildfire Fund’?

22:30    How did the legislation affect bond pricing and the outlook for long term investors?

25:22    Has the process and legislation meant that the California utilities companies have made changes to mitigate issues in future?  What’s a public safety power shutoff?

27:46    Has the pricing or mis-pricing of the bonds changed?

29:06    Equities people might have different views on the story to a bond investor.

30:38    Thinking about broader ESG – how does the utilities sector fare and what are they currently doing on this front?

35:39    Is holding a company throughout the bankruptcy process, as with PG&E, the right decision?

37:21    Has the pandemic changed views on the utilities sector?

39:43    Relating ESG to PG&E is hard and a little controversial, given they don’t have a great history.