Fitch Rates SCE's FMB Offering 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+/'F1' rating to Southern California Edison Company's (SCE) $300 million offering of floating rate first and refunding mortgage bonds, series 2014A, due 2015 (FMB). Proceeds will be used to repay commercial paper and/or for general corporate purposes. The Rating Outlook for SCE is Stable.

KEY RATING DRIVERS:
--Strong and relatively predictable utility earnings and cash flows;
--A balanced regulatory compact in the state of California;
--Effective execution of SCE's large capex program and timely recovery of related costs in rates;
--SCE's tiered rate structure and long-term concerns around competitive inroads from alternative energy supply;
--Recovery of costs associated with the shutdown of the San Onofre Nuclear Generating Station (SONGS).

The rating and Stable Outlook reflect SCE's strong, projected earnings and cash flows, relatively low debt leverage, a balanced regulatory compact in California, and strong projected credit metrics. The rating and Outlook also consider SCE's large capex program. Fitch assumes reasonable outcomes in proceedings before the California Public Utilities Commission (CPUC) to consider SONGS related costs recovery and SCE's pending 2015 general rate case (GRC).

The utility benefits from a balanced state regulatory environment that includes, among other credit supportive features, revenue decoupling, forward test years in regularly scheduled rate 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 approximate $18 billion - $21 billion during 2013 - 2017. Fitch estimates 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 estimates reflect revenue increases approved by the 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 GRC.

Fitch notes that an unexpected, significant deterioration in the regulatory compact in California, which 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 consider the utility's investment in the retired 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 issues are not expected by Fitch to trigger future credit rating downgrades. Nonetheless, a significant, unexpected disallowance would, all else equal, weaken SCE's financial ratios and heighten uncertainty regarding the regulatory compact in California. In this scenario, adverse future credit rating actions by Fitch cannot be ruled out.

Fitch notes that SCE recorded a pre-tax impairment charge of $575 million ($365 million after tax) in the 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 SCE also consider CPUC regulations that limit dividends and cash distributions from the utility to its corporate parent, Edison International (EIX; IDR rated 'BBB'; Outlook Positive by Fitch).

RATING SENSITIVITIES

A rating upgrade at SCE currently seems unlikely considering
SCE's large capex program, higher-than-industry-average rates, tiered rate structure, and secular concerns regarding competitive inroads from alternative energy suppliers.

An unexpected deterioration in the California regulatory environment, including an unexpected adverse outcome in the pending SONGS OII or other prospective rate proceedings could lead to future credit rating downgrades.

The inability of SCE to effectively execute its large capex program and fully recover costs in a timely manner could also result in adverse credit rating actions.

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, 2011);
--'Short-Term Ratings Criteria for Non-Financial Corporates', (Aug. 5, 2013).

Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816664
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Contacts

Fitch Ratings
Primary Analyst:
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Committee Chairperson:
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Committee Chairperson:
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com