In One Chart: Climate risks are bearing down on American utilities, especially in California. Rain may help, says Barclays
Extreme weather, drought and mammoth wildfires ravaged the U.S. again this year, deepening the economic toll of climate risks and making it harder for investors and utilities to ignore.
This year alone, 15%-20% of U.S. investment-grade utilities have taken a direct hit from extreme weather events, while half of those classified as “junk” or high-yield have been impacted, according to a new Barclays report.
Barclays analysts led by Bradly Rogoff pointed to utilities in four states — California, Florida, Louisiana and Texas — as most exposed since 1980 to economic damage of extreme weather events, which have greatly intensified in the past decade.
This chart spells out the states and utilities with the most extreme weather exposure:
NOAA, Barclays Research
President Joe Biden recently said the climate crisis has reached a “code red” threat level in the U.S., while surveying the damage to several East Coast cities battered by the remnants of Hurricane Ida.
Ida made landfall in Louisiana in late August and left almost 1 million customers without power, including those of Entergy Corp.
that state’s biggest energy provider and a dominant player in the South.
Before Ida, it was Winter Storm Uri, which knocked out power across parts of Texas in February, exposing the fragility of the state’s grid during an extreme cold snap. Then came the Dixie Fire this summer, California’s second-largest on record.
Given the climate risks, should debt investors avoid the most heavily impacted utilities? Not all of them, according to Barclays’ credit team, which talked Thursday in a podcast about why seasonal factors, including heavy rain in California this week, are part of their overweight recommendation for several mega utilities.
“For California, it’s not unusual to see wildfire season extend out to late November or early December,” Srinjoy Banerjee, Barclays utility and REITs credit research analyst said.
But heavy rain that put parts of Northern California on flood watch may also “help to bring this year’s fire season to an early close,” Banerjee said, as part of his bullish view for recommending Pacific Gas & Electric
debt, despite the continued climate risks.
The devastating 2018 Camp Fire, which was sparked by PG&E equipment, was started in mid-November and destroyed the town of Paradise, a harbinger of California’s intensifying battle against extreme wildfires.
It also tipped PG&E into Chapter 11 for the second time in less than 20 years. The power giant emerged from bankruptcy last year with more debt than before. In another unusual step, it also set up an $13.5 billion wildfire victims fund with payouts tied to its stock price.
PG&E equipment was also suspected of starting the Dixie Fire, which as of midweek was 97% contained.
PG&E shares rose 1.2% Thursday, but are 6.5% lower on the year so far. That compares with a 16.3% gain this year for the Dow Jones Industrial Average
and an 21.1% climb for the S&P 500 index
See: The hedge funds that left wildfire victims holding the bag on PG&E stock
Despite its woes, Barclays’ team has an overweight on PG&E’s first-mortgage bonds, given the new regulatory framework around California utilities, which includes a $21 billion wildfire fund and greater oversight aimed at fire prevention. “These all sort of help to reduce credit risks,” Banerjee said.
The team also has an overweight recommendation of Southern California Edison
debt and several Vistra Corp.
bonds maturing in 2027, but an underweight of Entergy Corp. debt.