TEXT - Fitch affirms Edison International
Jan 10 - Fitch Ratings has affirmed the ratings of Edison International (EIX) and Southern California Edison Company (SCE) as follows: EIX --Long-term Issuer Default Rating (IDR) at 'BBB'; --Short-term IDR at 'F2'; --Senior unsecured at 'BBB'. SCE --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'. The Rating Outlook for EIX and SCE is Stable. More than $13 billion of consolidated EIX debt is affected by the rating action, including and $9.7 billion of SCE debt. Key rating drivers for EIX and SCE include: --A stable regulatory regime in the state of California; --Strong projected utility operating cash flows, earnings and credit metrics; --SCE's tiered rate structure and competitive inroads from alternative energy supply is a long-term concern for investors; --The filing of EME and sixteen subsidiaries for protection under Chapter 11 of the U.S. Bankruptcy Code in December 2012; --Clear separation of the Edison Mission Energy (EME) corporate complex from EIX and SCE; The EIX ratings affirmation and Stable Rating Outlook primarily reflect the strong credit profile of its core operating electric utility subsidiary, SCE. The ratings also consider the insolvency of EME, EIX's wholly owned merchant generation subsidiary. For the twelve month period ended Sept. 30, 2012, SCE accounted for all of EIX's consolidated operating income and 62% of total EIX debt (including off-balance-sheet debt). EME Bankruptcy EME and 16 of its wholly owned subsidiaries filed for protection under Chapter 11 of the U.S. Bankruptcy Code on Dec. 17, 2012. EIX has managed EME on a stand-alone basis, and Fitch does not expect any direct financial exposure from the EME bankruptcy to the ultimate parent or SCE. Fitch downgraded EME and operating subsidiary Midwest Generation LLC's issuer default ratings to 'D' in December 2012. EIX and SCE ratings incorporate the utility's strong, projected earnings and cash flows, low debt leverage and a balanced regulatory/political environment in California. The ratings also recognize the challenges associated with SCE's large capital expenditure program. SCE's tiered rate structure and competitive inroads from alternative energy suppliers are key long-term rating concerns that could lead to future credit rating downgrades. Solid Credit Metrics On a consolidated basis, Fitch estimates EIX EBITDA-to-interest expense of 4.0x in 2013 and 4.5x in 2014, as EME works its way through bankruptcy. Fitch projects EIX debt-to-EBITDA of 3.7x in 2013 and 3.3x in 2014. Fitch expects SCE's credit metrics to remain consistent with its current 'A-' IDR, with EBITDA-to-interest and debt-to-EBITDA estimated to be better than 7x and 3x, respectively, in 2013 and 2014. Liquidity As of Sept. 30, 2012, EIX had consolidated cash and cash equivalents on its balance sheet totaling $1.080 billion. Of that amount, approximately $700 million resides at EME and is unavailable to EIX. Liquidity is strong at the EIX parent-company level, with just $28 million drawn on its $1.25 billion committed bank facility and just $400 million of outstanding debt maturing in 2017. Maturities SCE, as of Sept. 30, 2012, had available borrowing capacity of approximately $2.2 billion on its $2.75 billion of committed bank facility. SCE 2012 - 2016 maturities are manageable, totaling $1.9 billion with $1.2 billion, $300 million and $400 million maturing in 2014, 2015 and 2016, respectively. Infrastructure Investment The ratings also assume timely recovery of SCE's planned energy infrastructure investment, which is expected to approximate $13 billion during 2012 - 2014. SCE's capital investment program is focused on infrastructure spending to accommodate growth, reliability and renewable energy development and is consistent with California energy policy goals. Eighty percent of projected capex is earmarked for transmission and distribution system improvements. 2012 GRC The CPUC issued a final decision in SCE's 2012 GRC in November 2012. The GRC was filed with the commission in November 2010. The 2012 revenue increase is retroactive to Jan. 1, 2012 and will be recovered in rates in 2013. The commission's final decision is a reasonably balanced outcome, in Fitch's opinion, and supportive of earnings and cash flow credit metrics consistent with SCE's 'A-' Issuer Default Rating. The CPUC final decision grants rate increases totaling $986 million during 2012 - 2014, approximately 60% of the company's requested $1.6 billion. COC The CPUC issued a final decision in phase one of the COC proceeding Dec. 20, 2012, significantly reducing authorized returns in California. SCE's authorized ROE was reduced to 10.45% from 11.5%. Factoring changes in the cost of preferred and debt, SCE's revenue is expected to be approximately $220 million lower per annum, effective Jan. 1, 2013. Fitch notes that authorized returns in the state remain above the industry average. More importantly, regulatory mechanisms in the state provide a reasonable opportunity for SCE and the other IOUs operating in California to earn their authorized returns. High SCE Funding Needs As the result of anticipated high capital investment, Fitch expects SCE to be free cash flow negative and that the external capital requirements at the utility will be funded with a balanced mix of equity and debt, consistent with its CPUC authorized capital structure. Tariff Mechanisms Ameliorate Attrition Revenue decoupling, regulatory balancing accounts, forward looking test years, single issue rate cases and pre-approval of planned capital expenditures greatly reduce SCE's exposure to regulatory lag and operating cash flow attrition, in Fitch's opinion. SCE Distributions The ratings also consider CPUC regulations that limit dividends and cash distributions from the utility to EIX. EIX relies on SCE dividends and benefits from its tax sharing agreement to meet its obligations. Discrete EME Operations While inter-company loans and guarantees exist within the EME corporate complex there are no cross defaults, inter-company loans or guarantees between EME and either EIX or SCE. EME has paid no dividends to EIX, nor has EIX invested capital in EME in the decade preceding EME's December 2012 bankruptcy filing. EME and SCE are discrete enterprises within the EIX corporate family and have separate management teams. What Could Trigger A Rating Upgrade --Cancellation of EIX's ownership when EME emerges from bankruptcy could result in an upgrade for EIX; --An upgrade seems unlikely for SCE. What Could Trigger A Rating Downgrade --Significant deterioration in the regulatory compact in California could result in downgrades at EIX and SCE; --An unexpected change in EIX management strategy tilting toward aggressive diversification and/or shareholder friendly actions, including debt funded share repurchases could lead to future credit ratings downgrades.