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

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Southern California Edison Company's (SCE) $400 million offering of 1.125% first and refunding mortgage bonds (FMB), series 2014B, due 2017. Proceeds will be used to repay commercial paper and/or for general corporate purposes. The Rating Outlook for SCE is Stable.

Key rating drivers for SCE include:

--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 cost 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 GRCs, 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 $15 billion-$17 billion during 2014-2017. Fitch estimates that SCE's adjusted debt-to-EBITDAR will remain better-than 3.0x through 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 or other factors that would result in adjusted debt-to-EBITDAR weakening to 3.6x or worse on a sustained basis would likely trigger future credit rating downgrades for SCE. Fitch believes a material deterioration in California regulation, however, 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.

The stipulation reached by SCE, San Diego Gas & Electric Co. and relevant parties to the OII proceedings is a constructive event from a credit point-of-view, in Fitch's opinion. SONGS related issues are not expected by Fitch to trigger future credit rating downgrades.

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 'BBB+', Outlook Positive).

RATING SENSITIVITIES

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

Deterioration in the California regulatory environment, 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. SCE's ratings would likely be downgraded if these or other factors were to weaken SCE's leverage to worse than 3.6x

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 U.S. Utilities, Power, and Gas Companies' (March 11, 2014).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

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Contacts

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