NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'F2' rating to Edison International's (EIX) upsized $1.25 billion commercial paper (CP) program (from $1 billion). The Rating Outlook is Stable.
KEY RATING DRIVERS
--EIX's solid consolidated credit metrics;
--Strong and relatively predictable utility earnings and cash flows;
--Improved EIX consolidated business risk profile with the emergence of Edison Mission Energy (EME) from bankruptcy.
EIX's ratings and Stable Outlook primarily reflect the relatively predictable earnings and cash flows, low debt leverage, balanced regulatory compact at its core operating utility Southern California Edison Company (SCE). The ratings and Outlook also consider SCE's large capex program and assumes a reasonable outcome in its pending 2015 general rate case (GRC).
Fitch believes the amended stipulation reached by SCE, San Diego Gas & Electric Co. and relevant parties to San Onofre Nuclear Generating Station (SONGS) proceedings before the California Public Utilities Commission (CPUC) earlier this year is a positive event from a credit standpoint. A final CPUC decision regarding the SONGS settlement agreement is expected by year-end 2014.
If the SONGS stipulation is adopted by the CPUC, it would remove a source of uncertainty and headline risk for EIX investors. Fitch continues to believe that SONGS-related issues will not trigger future credit rating changes at EIX or SCE.
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 EIX's adjusted debt-to-EBITDAR will approximate 3.4x or better in 2014-2017.
SCE filed its 2015 GRC in November 2013, updating it in April 2014 to remove costs related to Four Corners and SONGS as directed by the administrative law judges assigned to the GRC. SCE currently supports a $142 million increase over currently authorized base rates and 2016 and 2017 attrition-year rate increases of $301 million and $315 million, respectively.
Fitch notes that an unexpected, significant deterioration in the regulatory compact in California or other factors that would result in adjusted EIX debt-to-EBITDAR weakening to 3.6x-3.75x or worse on a sustained basis would likely trigger future credit rating downgrades. 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).
Implementation of the legislation resulting in more balanced rate design would be a positive development for SCE and its parent's creditworthiness, in Fitch's view. In addition, the ratings for EIX recognize CPUC regulations that limit dividends and cash distributions from the utility to EIX.
EIX's ratings also consider its much improved business risk profile in the wake of EME's emergence from bankruptcy, which resolved all EIX exposure to its former subsidiary. Going forward, Fitch expects SCE to account for virtually all of EIX's consolidated operating earnings and cash flows.
Under the bankruptcy court approved reorganization EIX will continue to own EME, which emerged from bankruptcy free of liabilities, and consolidate it for tax purposes. Tax attributes of approximately $1.2 billion will be shared by EIX with EME creditors under the terms of the bankruptcy court approved restructuring.
EIX paid $225 million earlier this year to a trust formed under the terms of the EME restructuring and controlled by EME creditors. EIX has agreed to make two additional payments to EME creditors in September 2015 and 2016 bringing the total to approximately $643 million.
Fitch expects amortization of the tax benefits to more than fully fund the sharing of tax benefits with EME creditors and the joint and several liabilities assumed by EIX under the court approved plan of reorganization.
RATING SENSITIVITIES
A rating upgrade at EIX is challenged by the utility's relatively large capex program, higher-than-industry-average rates, tiered rate structure, and secular concerns regarding competitive inroads from alternative energy suppliers.
However, constructive outcomes regarding rate structure issues to be addressed in proceedings related to A.B. 327 along with sustained EBITDAR leverage of better than 3.25x could result in future positive rating actions at EIX.
Deterioration in the California regulatory environment, would likely lead to future EIX 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.
EIX's ratings would likely be downgraded if these or other factors were to result in EBITDAR leverage of 3.6x-3.75x or worse on a sustained basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent Subsidiary Linkage' May 28, 2014;
--'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=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=901414
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.