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   By Maria Armental 
 

Fitch Ratings said Wednesday it sees a mixed credit fallout from the recent California wildfires and investor-owned utilities like PG&E Corp. taking the brunt of the risk.

Earlier this year, the credit-rating firm downgraded PG&E and Edison International's Southern California Edison because of potential outsized liabilities from the wildfires. PG&E remains on negative credit watch, which means another downgrade could follow.

"The increased frequency of wildfires and sheer magnitude of potential exposure, coupled with an uncertain path to recovery, meaningfully expands business risk for electric utilities operating in California," Fitch said, adding that utilities' credit risks reflect the application of California's application of inverse condemnation.

Under a provision in California's constitution known as inverse condemnation, utilities can be held liable for property damage and legal expenses if their equipment is deemed to have been involved in igniting a fire, even if the utility followed all rules and regulations.

The state approved a law that gives utilities a clearer path to recover wildfire-related costs by issuing bonds paid off by customer surcharges -- provided that state regulators determine the companies acted reasonably in maintaining and operating their equipment and mitigating fire risks.

PG&E's stock has lost more than half of its value over the past 12 months and spreads have widened significantly as its financial exposure to the 2017 wildfires has been estimated at $15 billion. PG&E's liability would significantly increase if its equipment is linked to the deadliest fires, the Tubbs Fire in 2017 and the Camp Fire this year.

PG&E, whose Pacific Gas & Electric Co. unit is California's largest utility, has disclosed that a problem occurred on one of its high-voltage power lines in Northern California some 15 minutes before the start of the Camp Fire was reported. Fire officials haven't ruled on the cause of the fire.

Fitch also sees some counterparty risk for Kinder Morgan Inc.'s Ruby Pipeline because of significant exposure to PG&E.

The re-insurance, home construction and U.S. public finance sectors could also be impacted because of a state-wide economic slowdown, damaged infrastructure and associated environmental issues, Fitch said.

-- Erin Ailworth and Sara Randazzo contributed to this article.

Write to Maria Armental at maria.armental@wsj.com

(END) Dow Jones Newswires

November 28, 2018 15:14 ET (20:14 GMT)

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