Fitch Revises EIX's Outlook to Positive from Stable; Affirms EIX & SCE's
NEW YORK -- January 8, 2014
Fitch Ratings has revised Edison International's (EIX) Rating Outlook to
Positive from Stable. Fitch has also affirmed the ratings of EIX and its core
utility operating subsidiary, Southern California Edison (SCE), as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured at 'BBB'.
--Long-term IDR at 'A-';
--Short-term IDR at 'F1';
--Senior secured at 'A+';
--Senior unsecured at 'A';
--Senior secured pollution control revenue bonds at 'A+';
--Senior unsecured pollution control revenue bonds at 'A';
--Preferred at 'BBB+';
--Commercial paper at 'F1';
--Short-term secured at 'F1'.
The Rating Outlook for SCE is Stable.
Approximately $11.2 billion of EIX and SCE long- and short-term debt
outstanding as of Sept. 30, 2013 is affected by the rating actions.
Key rating drivers for EIX and SCE include:
--Uncertainty regarding claw-backs in Edison Mission Energy's (EME) bankruptcy
--The balanced regulatory compact in the state of California and the ability
to timely recover prudently incurred costs in rates;
--Strong projected utility operating cash flows, earnings and credit metrics;
--SCE's tiered rate structure and long-term concerns around competitive
inroads from alternative energy supply.
The Positive Rating Outlook at EIX reflects the meaningful improvement to its
consolidated creditworthiness as greater clarity emerges during pending EME
While the timing of the acquisition of EME by NRG Energy, Inc.(NRG), targeted
by NRG to close by the end of first quarter 2014, is uncertain, the proposed
acquisition, in Fitch's view, moves EME closer to resolution of its
restructuring in bankruptcy. Fitch believes a reasonable outcome regarding
claw-back efforts by certain EME creditors later this year would support
improving EIX credit ratings and a potential equalization of EIX and SCE's
IDRs over time in a reasonable worst-case scenario.
Future adverse developments in the EME bankruptcy from an EIX credit
point-of-view cannot be ruled out and are a source of uncertainty for
investors. Nonetheless, a reasonable solution to pending claw-back issues is a
likely catalyst for future EIX credit rating upgrades and supports the Rating
Outlook revision to Positive at EIX.
The affirmation of EIX and SCE's ratings primarily reflects the strong credit
profile of the holding company's core operating electric utility subsidiary,
The utility benefits from a balanced state and federal regulatory environment
that includes, among other credit-supportive features, revenue decoupling,
forward test years in regularly scheduled general rate cases (GRC),
bifurcation of cost-of-capital proceedings from GRCs, pre-approval of capex,
and riders for recovery of key expense items outside of GRC proceedings.
The balanced regulatory compact in California mitigates concerns regarding
SCE's large capex program, which is expected to be approximately $18
billion-$21 billion during 2013-2017. Fitch estimates that EIX and SCE's
EBITDA-to-interest and debt-to-EBITDA ratios will be better than 7.0x and
3.0x, respectively, during 2013-2017.
Fitch's 2013 and 2014 estimates reflect revenue increases approved by the
California Public Utilities Commission (CPUC) in SCE's 2012 GRC. In addition
to a test-year rate increase of $272 million, the CPUC's final decision in the
2012 GRC approved attrition-year rate increases of $358 million and $356
million, respectively, in 2013 and 2014.
In its final 2012 GRC decision, the CPUC approved total rate increases during
2012-2014 representing approximately 54% of the utility's request.
Going forward, Fitch assumes that the final decision in SCE's pending 2015 GRC
will be generally consistent with the balanced outcome in the utility's 2012
Fitch notes that an unexpected, significant deterioration in the regulatory
compact in California that would result in debt-to-EBITDA weakening to 3.4x or
worse on a sustained basis would likely trigger future credit rating
downgrades for SCE. Fitch believes a material deterioration in California
regulation is a low probability event in the near- to intermediate-term.
The utility and its parent company's credit ratings reflect potential secular
risks associated with California's strong commitment to low carbon energy
policy and technologies. In this regard, Fitch believes that enactment of
A.B.327 is a constructive development.
The legislation provides authority to the CPUC to adjust residential rates and
implement fixed charges, among other things, to address residential
cost-shifting issues and provide appropriate incentives to balance the
interests of customers and the investor-owned utilities (IOU).
Fitch's ratings for SCE and EIX consider the utility's investment in the
retired San Onofre Nuclear Generating Station (SONGS) and the commission's
pending order instituting investigation (OII) to consider related cost
recovery issues. Fitch believes precedent in the state supports full recovery
of SCE's prudently incurred costs related to the utility's investment in
SONGS. SONGS related operating issues are not expected by Fitch to trigger
future credit rating downgrades.
Fitch notes that SCE recorded a pre-tax impairment charge of $575 million
($365 million after tax) in second quarter 2013 due to the early retirement of
SONGS and its reclassification as a deferred asset.
The retired nuclear facility represents approximately $1.2 billion of rate
base and $2.1 billion of net investment, which compares to a year-end 2013
expected SCE rate base of more than $20 billion and total assets as of Sept.
30, 2013 of $46.3 billion.
SCE announced its decision to permanently retire SONGS Units 2 and 3 in June
2013 due to unexpected heat transfer tube wear in replacement generators at
both units. SONGS had been out-of-service since January 2012 when a tube leak
was discovered in Unit 3.
The ratings for EIX and SCE also consider CPUC regulations that limit
dividends and cash distributions from the utility to EIX. EIX relies on
dividends from SCE and benefits from its tax-sharing agreement to meet its
obligations. There are no cross defaults, inter-company loans or guarantees
between EME and either EIX or SCE.
Greater clarity with regard to EIX's exposure to the EME restructuring in
bankruptcy could result in an upgrade for EIX.
The following might lead to a downgrade:
Conversely, significant deterioration in the regulatory compact in California
could result in credit rating downgrades at EIX and SCE. In addition, an
unexpected change in EIX management strategy that tilted toward aggressive
diversification and/or shareholder-friendly actions, including debt-funded
share repurchases, could lead to future credit downgrades. In the longer term,
increasing competitive pressure from alternative technologies could result in
future credit downgrades.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including short-Term Ratings and Parent
Subsidiary Linkage' Aug. 5, 2013;
--'Recovery Ratings and Notching Criteria for Utilities' Nov. 19, 2013;
--'Rating North American Utilities, Power, Gas, and Water Companies' May 16,
--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 5, 2013.
Applicable Criteria and Related Research:
Short-Term Ratings Criteria for Non-Financial Corporates
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Philip W. Smyth, CFA, +1 212-908-0531
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Glen Grabelsky, +1 212-908-0577
Shalini Mahajan, +1 212-908-0351
Brian Bertsch, +1 212-908-0549
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